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THE  BUSINESS   MAN 

AND 

HIS   BANK 


puimnnipm 


Vkc  QrawOlillhook  (h.  Jm 

PUBLISHERS     OF     U  O  O  K.  S      F  O  R_^ 

Coal  Age  "="  Electric  Railway  Journal 
Electrical  World  "^  Engineering  News -Record 
American  Machinist  v  Ingenierfa  Internacional 
Engineering  S Mining  Journal  ^  Power 
Chemical  G  Metallurgical  Engineering 
Electrical  Merchandising 


li 


THE  BUSINESS  MAN 

AND 

HIS  BANK 


BY 
WILLIAM   H.   KNIFFIN 


AUTHOR     OP     THE      PRACTICAL      WORK     OF     A     BANK;       THE     SAVINGS     BANK      AND     ITS 

PRACTICAL   ■work;     COMMERCIAL     PAPER    AND    ANALYSIS   OF   CREDIT  STATEMENTS; 

AGRICULTURAL   CREDIT  BANKS   OF   THE    WORLD;    BILLS    OF   EXCHANGE    OF  THE 

WORLD,     ETC.,     ETC.        VICE-PRESIDENT,     BANK     OP     ROCKVILLE     CENTRE, 

LONG    ISLAND,    AND   INSTRUCTOR  IN   BANKING    PRACTICE,   NEW    YORK 

UNIVERSITY. 


First  Edition 
Second  Impression 


McGRAW-HILL  BOOK  COMPANY,  Inc. 

NEW   YORK:     370   SEVENTH   AVENUE 

LONDON:    6  «Sc  8  BOUVERIE  ST.,  E.  C.  4 

1920 


Copyright,  1920,    by  the 
McGraw-Hill  Book  Company,  Inc. 


THE  MAPLE  PRESS  YORK  PA 


PREFACE 

The  man  who  stands  before  the  counter  screen  of  a 

J  bank  looks  at  a  piece  of  compHcated  yet  smooth  working 

machinery  that  is  to  him  a  deep  mystery.     He  admires 

but  does  not  understand  it.     He  knows  that  the  receiving 

teller  takes  his  deposit  and  the  paying  teller  cashes  his 

check.     When  he  makes  a  loan  he  gets  the  use  of  the 

funds,  how  he  does  not  know.     He  does  not  understand 

the  bank  processes  any  more  than  the  average  man  under- 

/fl  stands  the  mechanism  of  his  automobile.     He  knows  its 

f*  functions  and  that  is  enough.     Only  when  it  ceases  to 

X  work  smoothly  does  he  appreciate  how  delicate  is  the 

machine  that  serves  him. 

'      Heretofore  all  writers  on  banking  have  treated  the  sub- 

-» ject  from  within,  for  the  information  of  the  bank  clerk 

[S  and  the  student  of  banking.     It  is  the  writer's  aim  to 

treat  the  bank  from  without;  to  show  how  it  touches  the 

A  interests  of  the  business  man  and  get  the  point  of  con- 

A  tact  from  the  customer's  viewpoint.     In  discussing  the 

subject  of  credit,  for  instance,  I  have  tried  to  show  what 

the  applicant  for  credit  should  bring  to  the  bank,  rather 

than  what  the  bank  man  should  require. 

It  is  a  composite  picture  of  banking  as  it  has  impressed 
itself  upon  the  writer  after  many  years  of  experience, 
first  in  mutual  savings  banks,  then  in  national  banks  and 
lastly  in  a  state  bank  under  the  able  supervision  of 
New  York  State.  If  credit  is  due  any  one  it  is  to  the 
publisher  for  suggesting  that  such  a  work  would  be  ac- 
ceptable to  the  business  man. 

W.  H.  K. 

RocKviLLE  Centre,  Long  Island, 
July,  1920. 


f 


:^ky^^i 


CONTENTS 


Page 

Preface v 


CHAPTER  I 

The  Bank  and  the  Business  Man 1 

The  Old  Conception  of  Banking 2 

CHAPTER  II 

Types  of  Banking  Institutions 5 

Banks  of  Discount 5 

Trust  Companies 6 

National  and  State  Banks 7 

Savings  Banks 9 

Building  and  Loan  Associations 14 

Mortgage  Companies 15 

Title  Companies 15 

Safe  Deposit  Companies 16 

Other  Banking  Institutions 17 


CHAPTER  III 

Choosing  Your  Bank 19 

Banks  have  Reputations 20 

Progressive  Banks 21 

Your  Bank  Balance 23 

What  Is  a  Satisfactory  Balance? 24 

Interest  on  Daily  Balances 25 

CHAPTER  IV 

The  Point  of  Contact 27 

Opening  a  New  Account 28 

Corporation  Accounts 30 

Partnership  Accounts 31 

Fiduciary  Accounts 31 

The  Pass  Book 32 

vii 


viii  CONTENTS 

CHAPTER  V 

Page 

The  Receiving  Teller 34 

Checks  without  Indorsement 36 

Keep  a  Record  of  Checks  You  Deposit 37 

The  Transit  Number  on  Checks 38 

How  to  Detect  Counterfeit  Money 39 

Checks  to  Officers  of  Corporations 41 

CHAPTER  VI 

How  TO  Indorse  a  Check 42 

Different  Forms  of  Indorsement 43 

CHAPTER  VII 

Bank  Checks  and  Their  Collection 46 

Checks  Transfer  Rights 46 

Importance  of  Bank  Checks 47 

Why  Bank  Checks  Should  Be  Collected 48 

How  Checks  Should  Be  Drawn 50 

CHAPTER  VIII 

Protection  of  Bank  Checks 52 

Kiting  Checks 54 

Forgery 57 

CHAPTER  IX 

The  Paying  Teller 74 

The  Bank's  Obligation  to  Pay  Checks 75 

Important  Features  of  Bank  Checks 76 

The  Business  Man  and  the  Paying  Teller 77 

Certification 78 

Checks  Paid  in  the  Order  of  Their  Presentation 79 

Legal  Tender 80 

Uncollected  Funds 82 

Stale  Checks 82 

Memoranda  on  Checks 83 

Checks  for  Small  Sums 84 

Stop  Payment 84 

Reconcihng  Your  Bank  Account 85 

CHAPTER  X 

Collecting  out  of  Town  Checks 87 

Collecting  Large  Checks 88 

Collecting  Checks  Direct 89 


CONTENTS  ix 
CHAPTER  XI 

Page 

Exchange 92 

Creating  Reserve  Accounts 93 

"Par  Points" 95 

CHAPTER  XII 

Profitable  and  Unprofitable  Accounts 97 

The  Journey  of  a  Bank  Check 101 

Direct  Routing 102 

CHAPTER  XIII 

Collection  of  Checks  Through  the  Clearing  House 105 

The  Purpose  of  the  Clearing  House 106 

The  Clearing  Principle 107 

The  Clearing  Process 108 

CHAPTER  XIV 

Overdrafts 113 

CHAPTER  XV 

Protest 116 

Time  of  Notice 117 

CHAPTER  XVI 

Credit  and  Banking 119 

The  Science  of  Banking 120 

Credit  and  Business 121 

Credit  Defined 122 

"Rights" 123 

Forms  of  Credit 123 

Acceptances 126 

CHAPTER  XVII 

The  Science  of  Credit 128 

Credit  is  Sensitive 129 

The  Business  Risk 130 

Why  Men  Pail 131 

The  Property  Risk 134 

The  Bank  Account  as  an  Indicator  of  Credit 135 

The  Statement 137 

Refusal  to  make  a  Statement 137 

The  Statement  Should  be  Complete 139 


X  CONTENTS 

CHAPTER  XVIII      • 

Page 

How  TO  Prepare  a  Statement 140 

Cash 141 

Accounts  Receivable 141 

Merchandise 142 

Bills  Receivable 143 

Fixed  Assets 144 

Commercial  Paper 146 

The  Fixed  Liabilities 149 

CHAPTER  XIX 

Bank  Loans 150 

Recording  the  Loans 151 

Loans  and  Discounts  Distinguished 152 

Helpful  Rules  Regarding  Promissory  Notes 153 

Collateral  Loans 154 

Making  a  Collateral  Loan 155 

Loan    Secured  by  Real  Estate 156 

Substitutions 157 

The  Profitableness  of  Borrowing  on  Securities 157 

Proper  Form  of  Collateral 158 

Warehovise  Loans 160 

Goods  Held  in  Trust 161 

Automobile  Loans 162 

Loans  on  Accounts  Receivable 164 

Borrowing  on  Receivables 165 

CHAPTER  XX 

Collections 167 

Various  Kinds  of  Collections 168 

"Duns" 170 

Grain  Drafts 172 

Parties  to  a  Collection 173 

Recall  of  Notes 174 

Bank  Statement 175 

CHAPTER  XXI 

How  TO  Read  a  Bank  Statement 177 

Bond  Investments 179 

Banking  House 180 

Real  Estate  Owned 181 

Land  Contracts 181 

Mortgages  Owned 181 


CONTENTS  xi 

Page 
Loans  and  Discounts  Secuiod  l)y  Bond  and  Mortgage,  Doed  or 

Other  Real  Estate  Collateral 182 

Loans  and  Discounts  Secured  by  Other  Collateral 182 

Loans,  Discounts  and  Bills  Purchased,  not  Secured  by  Collateral  183 

Overdrafts 183 

Due  from  Reserve  Agents  (or  Legal  Depositories) 183 

Due  from  Trust  Companies,  etc 184 

Specie  and  Currency 184 

Exchanges  and  Checks  for  Next  Days  Clearings 185 

Furniture  and  Fixtures 185 

Accrued  Interest 185 

Customers  Liability  on  Account  of  Acceptances 186 

Capital  Stock 186 

Surplus  Fund 187 

Undivided  Profits 187 

Deposits 188 

Due  Banks  and  Trust  Companies 190 

Bank's  Liability  on  Account  of  Acceptances 190 

Bills  Payable 190 

Reserves  for  Taxes,  etc 191 

Interest  Accrued  to  Depositors 192 

Unearned  Discount 192 

CHAPTER  XXII 

Acceptances  and  Their  Uses 193 

The  Purpose  of  Bills  of  Exchange 193 

Practical  Use  of  a  Bill  of  Exchange 194 

Present  Day  Financing  Methods 196 

The  Disadvantages  of  the  Open  Account 197 

The  Object  of  the  Acceptance 199 

Forms  of  Acceptances 200 

Classes  of  Acceptances 202 

The  Operation  of  a  Bank  Acceptance  in  a  Foreign  Transaction  202 

A  Domestic  Acceptance 205 

Principles  of  the  Acceptance 205 

Advantages  of  the  Acceptance  to  the  Seller 207 

Advantages  to  the  Buyer 209 

Advantages  to  the  Banks 209 

Acceptances  not  an  Innovation 210 

CHAPTER  XXIII 

Savings  Banks 213 

The  Function  of  the  Savings  Bank 214 

Mortgage  Loans 215 


xii  CONTENTS 

Page 

How  a  Mortgage  Loan  is  Made 216 

Valuation  of  Real  Estate 218 

Bond  Investments 219 

Interest  Rules 219 

The  Management  of  a  Savings  Bank 220 

The  Routine  of  the  Savings  Bank 222 

CHAPTER  XXIV 

Bank  Examinations 225 

What  the  Bank  Examiner  Does 225 

The  Bank  Examiner  at  Work 226 

CHAPTER  XXV 

The  Federal  Reserve  Bank  and  Its  Relation  to  Business.    .  229 

Federal  Reserve  Banks  Create  Confidence 230 

Panics • .232 

Defects  in  the  Old  System 233 

Scattered  Reserves 235 

Hoarding 236 

Government  Money 237 

Our  Inelastic  Currency 237 

No  Rediscount  System 239 

Essential  Features  of  the  Federal  Reserve  Bank 240 

Administrative  Control 241 

Consolidated  Reserves 242 

Federal  Reserve  Rediscount  System  and  Federal  Reserve  Notes  244 

Federal  Reserve  Bank  Notes 247 

Collecting  Checks  Through  the  Federal  Reserve  Bank   ....  248 

Gold  Settlement  Fund 250 

CHAPTER  XXVI 

Foreign  Exchange 253 

How  Foreign  Exchange  Arises 256 

Instruments  of  Foreign  Exchange 258 

The  Basis  of  Exchange 261 

The  Monopoly  of  the  English  Banks 262 

Forms  of  Bills 265 

The  Rise  and  Fall  of  Exchange  Rates 266 

American  Banks  in  the  Foreign  Exchange  Market 269 

Goods  on  Trust  Receipt 273 

Index  ...        275 


THE  BUSINESS  MAN  AND 
HIS  BANK 


CHAPTER  I 
THE  BANK  AND  THE  BUSINESS  MAN 

Banking  and  business  are  so  closely  interwoven  that 
each  would  be  quite  impossible  without  the  other; 
certainly  each  would  be  unprofitable  without  the  other. 
The  success  of  business  enterprises  depends  largely 
upon  the  cooperation  of  the  banks,  and  the  profitable- 
ness of  the  banks  depends  largely  upon  the  borrowings 
of  business.  The  relation  is  reciprocal.  The  business 
man  who  succeeds  in  the  highest  sense  is  the  one  who 
appreciates  the  functions  of  the  bank  and  uses  them  to 
his  own  profit;  and  the  bank  that  succeeds  is  the  bank 
that  assumes  a  helpful  attitude  toward  business,  adopts 
an  aggressive  policy,  has  a  broad  vision,  and  extends 
liberal  yet  sound  credit  to  its  clients. 

There  was  a  time,  not  so  far  distant,  when  the  business 
man  approached  the  banker  as  a  supplicant  for  favor. 
When,  by  the  grace  of  the  banker,  he  opened  an  account, 
it  was  a  matter  of  courtesy,  and  he  was  the  beneficiary. 
If  he  asked  for  a  loan,  it  was  not  as  a  matter  of  business — 
a  right  to  which  he  was  entitled — but  as  an  act  of  con- 
descension. The  element  of  credit  in  its  broad  and  prac- 
tical aspects  had  not  yet  come  to  be  a  vital  part  of  the 
bank's  operations,  nor  the  granting  of  loans  the  result 
of  scientific  study  and  standardized  rules.     The  credit 

1 


2  THE  BUSINESS  MAN  AND  HIS  BANK 

statement  was  not  a  factor  in  the  operation  of  the  bank 
and  the  condition  of  the  borrower  was  known  only  in 
a  general  way.  The  banker  knew^  the  man,  was  familiar 
with  his  account  and  the  general  character  of  his  busi- 
ness, but  he  did  not  know  in  figures  how"  the  borrower 
stood  from  the  viewpoint  of  net  worth,  sales,  volume  of 
business,  profits  and  progress.  The  banker's  knowledge 
was  casual;  and  because  of  his  limited  information  he 
paid  dearly  in  losses  which  would  have  been  avoided 
under  better  and  more  exact  methods. 

The  Old  Conception  of  Banking. 

Until  a  comparatively  few  years  ago  banks  did  not  ad- 
vertise. They  did  not  solicit  business.  If  they  carried 
their  card  in  the  paper,  it  merely  gave  their  capital  and 
surplus,  and  the  directorate.  Some  banks  have  boasted 
that  they  have  never  advertised.  Others  change  copy 
only  as  to  names  and  dates.  A  certain  bank  cashier  in 
New  York  resigned  his  position  because  his  bank  began 
to  advertise  for  business.  To  him  it  w^as  unethical, 
dangerous,  and  a  sign  of  weakness.  His  idea  was  that 
the  bank  must  take  what  was  offered,  rather  than  at- 
tempt to  attract  business  to  itself. 

The  old  conception  of  banking  was  that  the  bank  must 
conduct  itself  wdth  dignity  plus  a  coldness  that  would 
impress  itself  upon  the  public,  just  as  the  iceberg 
impresses  the  traveler.  The  bank  must  be  respected 
but  not  loved.  It  did  not  want  affection,  but  honor. 
If  the  public  felt  too  friendly  toward  a  bank,  how  could 
it  operate  safely?  Even  yet  there  are  banks  that  work 
on  the  theory  that  the  more  business  they  have  the  worse 
off  they  are,  and  that  the  more  the  customer  owes,  the 
more  he  has  to  pay,  and  the  heavier  his  burden. 

Under  the  old  regime,  when  a  merchant  wanted  to 
borrow,  he  did  so  at  his  own  bank.     To  have  gone  to 


THE  BANK  AND  THE  BUSINESS  MAN  3 

another  bank  and  negotiated  a  loan  would  have  been  an 
evidence  of  weakness,  a  sure  sign  of  trouble  ahead. 
And  the  offering  of  one's  paper  broadcast,  as  is  now  done 
by  commercial  paper  brokers,  would  have  been  financial 
suicide. 

Gradually  there  has  come  about  a  change,  both  on 
the  part  of  the  banker  and  on  the  part  of  the  business 
man.  The  bank  no  longer  keeps  itself  in  seclusion. 
It  has  a  new  business  department  that  seeks  new"  accounts 
constantly  and  consistently.  It  advertises  extensively. 
It  invites  business  by  offering  real  and  efficient  service 
that  redounds  to  the  benefit  of  both  itself  and  the  cus- 
tomer. The  banker  now  believes  in  growing.  He  wants 
a  large  bank  to  handle  large  propositions.  He  works 
on  the  theory  that  large  debts  (deposits)  constitute  no 
danger  if  he  has  good  assets  to  meet  them.  From  this 
point  of  view  the  more  his  debts  the  better  he  is  satisfied. 
The  business  man  is  importuned  to  borrow,  and,  if 
he  does  not  do  so  he  is  not  a  good  business  man. 

On  the  other  hand,  the  business  man  now  understands 
better  the  banker's  attitude.  He  knows  banking  prac- 
tice better  than  did  his  father  and  knows  better  how 
to  use  the  bank  in  connection  with  his  business.  The 
work  of  the  bank  as  he  sees  it  through  the  screen  may  be 
a  mystery  to  him,  and  the  machinery  vast,  complicated 
and  intricate;  but  he  knows  how  he  and  the  bank  func- 
tion together.  He  opens  an  account  with  the  distinct 
understanding  that  he  will  borrow.  He  may  even 
know  how  much  he  will  be  allow^ed  to  borrow  before  he 
signs  his  name  to  the  bank's  signature  card.  He  makes 
an  agreement  with  the  bank  in  regard  to  the  collection 
of  his  checks,  the  average  balance  of  his  account,  the 
interest  to  be  allowed  him  on  the  balance,  and  submits 
his  statement  as  a  basis  of  the  business  he  expects  to  do. 
He   takes   his   business   problems   to   his   banker.     He 


4  THE  BUSINESS  MAN  AND  HIS  BANK 

often  chums  with  him,  and  the  two  work  together  for 
their  mutual  good.  They  both  have  the  point  of  con- 
tact, and  each  understands  the  mind  of  the  other. 
This  has  been  a  slow  but  steady  development,  and  our 
present  high  state  of  business  efficiency  is  due  to  this 
evolutionary  process. 

Twenty-five  years  ago,  the  business  man  desiring  to 
open  a  checking  account  would  go  to  the  bank  of  dis- 
count. If  he  had  a  surplus  of  funds  to  place  on  interest, 
he  would  go  to  the  savings  bank.  If  he  had  valuables, 
he  locked  them  in  his  safe  or  hid  them  away.  If  he 
made  a  will,  he  named  a  friend  or  relative  as  his  executor. 
If  he  bought  and  sold  securities,  he  did  so  through  the 
city  broker. 

Now,  however,  he  may  open  a  checking  account,  bor- 
row money,  place  surplus  funds  on  interest,  store  his 
valuables,  buy  and  sell  securities,  and  have  his  will 
administered,  without  going  outside  the  doors  of  a 
modern,  many-sided  banking  institution.  A  bank  is  no 
longer  a  bank — it  is  a  department  store  of  finance. 


CHAPTER  II 

TYPES  OF  BANKING  INSTITUTIONS 

The  banks  of  this  country  divide  themselves  into  two 
groups:  banks  of  discount  —  often  called  commercial 
or  "business"  banks;  and  savings  institutions.  The  for- 
mer are  the  more  common  and  include  the  trust  com- 
panies. 

Banks  of  Discount. 

The  work  of  the  bank  of  discount  may  be  divided  into 
five  departments:  1.  The  receipt  of  money  and  checks 
on  deposit,  against  which  checks  may  be  drawn.  2.  The 
making  of  loans.  These  are  loans  on  the  general  credit 
of  the  borrower,  with  or  without  an  indorser,  and  secured 
or  collateral  loans,  made  against  securities  of  various 
kinds.  3.  The  discount  of  negotiable  instruments,  the 
most  common  being  promissory  notes  and  drafts  or 
bills  of  exchange.  While  this  feature  is  similar  to  the 
loaning  of  money,  it  has  a  distinction  in  that  the  ad- 
vance is  made  by  '' discounting"  or  ''buying"  the 
instruments  which  are  owned  by  the  one  to  whom  the 
loan  is  made.  The  most  numerous  of  these  are  notes 
taken  in  payment  for  goods  or  services.  In  order  to 
have  immediate  use  of  the  funds  represented  thereby, 
they  are  sold  to  the  bank  at  a  discount.  Thereupon  the 
bank  becomes  the  owner  of  the  note,  collects  the  amount 
when  due,  and  looks  to  the  one  for  whom  the  discount 
was  made  if  payment  is  not  made  by  the  maker  as 
stipulated  in  the  note.  4.  The  collection  of  drafts, 
coupons,  promissory  notes^  and  other  such  instruments 


6  .      THE  BUSINESS  MAN  AND  HIS  BANK 

that  are  left  with  it  by  customers.  By  reason  of  their 
wide  connections  throughout  the  country,  banks  are 
enabled  to  collect  such  instruments  promptly  and  with 
Httle  expense.  They  are  sent  by  the  bank  to  its  corre- 
spondents and  by  the  latter  presented  to  the  obligor  and 
the  proceeds  remitted  to  the  collecting  bank.  It  matters 
not  how  far  from  home  the  collecting  point  may  be, 
the  machinery  works  smoothly.  5.  The  issue  of  money. 
In  the  conduct  of  business  it  becomes  necessary  to  have 
a  substitute  for  metallic  money,  which  is  costly  and 
cumbersome  to  handle,  and  of  which  there  is  not  suffi- 
cient to  meet  the  needs  of  the  business  world.  In  order 
to  avoid  the  use  of  metal  it  is  necessary  to  have  a  form 
of  money  that  can  be  handled  easily  and  conveniently. 
Daniel  Webster  observed  that  the  power  to  issue  money 
distinguishes  a  bank  from  all  other  monied  institutions. 
The  process  by  which  such  money  is  created  will  be 
treated  subsequently,  but  the  power  to  issue  money  is 
now  reserved  to  national  banks  and  the  Federal  Reserve 
Banks.  It  is  one  of  the  most  useful  functions  of  the 
Federal  Reserve  Banks,  and  one  which  vitally  affects 
the  interest  of  business  great  and  small. 

In  addition  to  the  foregoing,  we  have  w^hat  is  called 
"trust  powers"  or  the  power  to  act  as  trustee  in  estates 
and  bankruptcies,  as  executor  of  wills,  guardians  of 
minors,  registrars  of  stocks  and  bonds,  etc.  These 
powers  are  necessary  to  the  common  welfare  and  prof- 
itable to  the  banks  and  trust  companies  enjoying  them. 
Such  powers  were  formerly  reserved  to  the  trust  com- 
panies, but  have  recently  been  granted  to  national 
banks,  and  state  banks  in  some  jurisdictions. 

Trust  Companies. 

There  are  also  to  be  mentioned  in  this  connection,  the 
trust  companies  which  are  in  most  instances  banks  under 


TYPES  OF  BANKING  INSTITUTIONS  7 

another  name,  doing  the  same  business  as  banks  of  dis- 
count, with  the  exception  of  issuing  bank  notes.  The 
trust  companies  have  the  added  powers  heretofore  given 
to  them  exclusively  and  mentioned  above,  but  now 
fast  coming  to  be  part  of  the  operation  of  banks  of  dis- 
count. Many  trust  companies  are  simon  pure  banks, 
doing  little  or  no  trust  business;  there  are  others  though 
extremely  few  that  have  adhered  closely  to  their  original 
functions.  When  we  speak  of  a  bank,  we  ordinarily 
refer  to  the  banking  function  as  carried  on  by  both  banks 
and  trust  companies.  The  trust  function  is  exercised 
in  so  relatively  few  instances  that  it  does  not  affect  the 
banking  public  as  do  the  functions  of  deposit,  discount 
and  note  issue.  The  trust  function  is,  however,  becom- 
ing more  largely  used  as  the  advantages  and  conveniences 
of  corporate  trusteeship  are  becoming  better  understood 
on  the  part  of  the  public. 
National  and  State  Banks. 

There  is  no  material  difference  between  national  and 
state  banks.  The  former  operate  under  charters 
issued  by  the  Comptroller  of  the  Currency  to  whom 
they  are  responsible  as  the  supervising  head.  The 
latter  are  under  the  control  of  the  various  states,  secure 
their  charters  from  the  state  authorities  and  are  subject 
to  the  control  of  a  state  official  usually  designated 
"Superintendent  of  Banks." 

The  national  banks  are  subject  to  the  provisions  of  the 
National  Bank  Act,  and  are  therefore  uniform  in  this 
respect,  while  the  state  banks  are  subject  to  the  bank- 
ing laws  of  the  various  states  which  differ.  In  so  far 
as  they  affect  the  business  man,  their  differences  are 
unimportant;  and  their  relative  safety  depends  alto- 
gether upon  the  personnel  of  the  bank. 

There  is  a  prevalent  opinion  that  the  national  banks 
are  in  a  sense  guaranteed  by  the  Government,  because 


8  THE  BUSINESS  MAN  AND  HIS  BANK 

the  Government  has  supervision  over  them  and  the 
word  ''national"  appears  in  their  title.  All  national 
banks,  except  a  few  that  were  taken  into  the  national 
system  and  allowed  to  use  their  old  names  with  the 
initials  "N.  B.  A."  (National  Banking  Association)  are 
required  to  have  the  word  "national"  in  their  title,  and 
by  this  they  may  be  distinguished  from  state  banks. 
Many  of  the  largest  banks  and  trust  companies  in 
New  York  and  other  large  cities  are  state  institutions, 
and  to  conclude  that  because  they  are  not  under  national 
charter  they  are  by  that  token  weakened,  is  to  come  to 
a  conclusion  not  warranted  by  the  facts.  As  a  matter 
of  fact  the  examinations  of  the  state  authorities  and  the 
general  oversight  given  by  many  of  the  state  banking 
departments  are  of  equal  if  not  superior  quality  to  the 
national  administration;  and  herein  the  author  speaks 
from  experience,  having  been  under  both  regimes. 

It  is  no  reflection  upon  a  bank  to  be  a  state  institution 
nor  to  be  a  depositor  therein,  nor  is  it  any  distinction 
to  do  business  with  a  national  bank.  It  is  the  quality 
of  the  bank  and  not  its  name  that  distinguishes  it  as  an 
institution. 

National  banks  are  required  to  join  the  Federal  Re- 
serve System,  while  state  banks  and  trust  companies 
may  do  so  upon  the  same  general  terms.  National 
banks  may  issue  bank  notes,  but  this  is  no  longer  a 
mark  of  honor,  since  the  Federal  Reserve  Banks  wiU 
ultimately  take  over  the  note  issue  power  and  exercise 
it  exclusively. 

The  reserves  required  for  state  banks  are  sometimes 
less  than  for  national  banks,  but  this  does  not  affect 
the  business  man  and  is  a  matter  of  technique  only.  The 
ratio  of  loans  for  state  banks  differs  in  some  states  from 
that  allowed  national  banks,  and  this  may  be  a  factor 
to  consider;  but  this  can  only  be  determined  by  com- 


TYPES  OF  BANKING  INSTITUTIONS  9 

paring  the  loaning  restrictions  of  national  banks  with 
state  banks  in  the  same  jurisdiction. 

Other  than  these  nonessential  variations,  there  is  no 
material  difference  between  the  two  types  of  banks; 
and  the  same  truths  obtain  as  respects  trust  companies, 
which  are  merely  state  banks  with  added  powers.  In 
fact  the  work  of  a  trust  company  is  so  much  akin  to  the 
work  of  a  bank,  as  a  bank  is  commonly  understood, 
that  they  may  well  be  considered  as  banks,  in  every 
aspect,  except  their  trust  powers. 

Savings  Banks. 

We  have  next  to  consider  the  savings  banks,  particu- 
larly the  mutual  savings  banks,  which  are  in  the  great 
minority  as  compared  with  about  thirty  thousand  banks 
of  discount.  There  are  only  about  seven  hundred  such 
institutions  in  this  country.  Savings  banks  are  in  the 
nature  of  mutual  investment  institutions  helping  the 
man  of  small  means  to  save,  and  giving  him  a  fair  return 
upon  his  savings;  in  short,  they  invest  his  money  for  him. 

The  distinction  between  business  banks  and  savings 
banks  may  be  seen  in  several  ways: 

First  in  the  nature  of  the  corporation.  The  business 
bank  is  organized  by  stockholders  who  combine  their 
capital  for  the  purpose  of  establishing  a  bank.  When 
a  bank  is  organized,  or  promoted,  those  who  are  back  of 
the  movement  soUcit  subscriptions  to  the  capital  stock, 
the  same  as  in  any  other  form  of  corporation.  The 
investor  "subscribes"  to  the  capital  stock,  which  means 
that  he  agrees  to  buy  a  certain  number  of  shares  at  a 
fixed  price  per  share.  He  thus  becomes  a  stockholder, 
and  part  owner  of  the  bank. 

It  is  the  stockholder's  capital  that  forms  the  first 
working  fund  of  the  bank.  The  stock  is  usually  sold 
at  a  premium,  that  is,  let  us  say  $125  a.  share.     The 


10  THE  BUSINESS  MAN  AND  HIS  BANK 

par  of  the  stock  must  be  $100,  and  the  $25  would  ordi- 
narily be  applied  in  the  proportion  of  $20  to  the  surplus 
or  guaranty  fund,  and  $5  to  the  expense  fund,  from 
which  the  furniture  and  fixtures,  safes,  and  equipment 
will  be  bought.  The  stockholders  are  the  owners  of 
the  bank.  They  elect  the  board  of  directors  'and  the 
board  of  directors  elect  or  appoint  the  officers.  All 
the  profits  of  the  bank  belong  to  the  stockholders.  If 
losses  occur  they  are  the  ones  to  suffer.  It  is  the  general 
rule  of  law  that  the  stockholder  is  liable  to  an  amount 
double  the  par  value  of  his  stock.  Thus  if  the  bank 
should  fail  the  stockholder  owning  one  share  of  stock 
would  be  subject  to  an  assessment  of  $100  or  a  propor- 
tionate amount  to  make  good  the  losses,  besides  having 
his  stock  cancelled. 

In  the  savings  bank,  such  as  we  have  in  New  York, 
New  Jersey,  Pennsylvania,  and  the  New  England 
States,  there  are  no  stockholders.  When  a  bank  is 
planned  (there  have  been  less  than  fifty  such  banks 
organized  during  the  past  35  years  in  the  United  States) 
the  organizers  have  no  stock  to  sell.  What  they  must 
secure  is  not  stock  subscriptions  for  the  proposed  amount 
of  capital,  but  a  certain  number  of  men  who  will  agree 
to  contribute  the  necessary  expenses  during  the  period 
the  bank  is  unable  to  maintain  itself.  They  must  pay 
the  salaries  and  running  expense  until  the  bank  can  earn 
sufficient  to  meet  its  own  expenses.  In  New  York 
they  must  subscribe  to  an  expense  fund  of  not  less  than 
$5000  and  a  guaranty  fund  of  the  same  amount,"  as  evi- 
dence that  the  bank  will  be  carried  until  it  becomes 
self  supporting.  When  the  bank  earns  a  surplus  above 
its  expenses  and  interest  to  depositors,  these  advances 
may  be  returned  with  interest.  In  some  cases  in  New 
York  it  has  taken  years  to  bring  the  bank  to  a  position 
where   it    could   repay  these   advances.     The    men    so 


TYPES  OF  BANKINC;  INSTITUTIONS  11 

selected  become  the  "trustees"  as  distinguished  from 
the  ''directors"  of  other  banks.  In  case  of  vacancy  in 
the  board  of  the  savings  bank,  the  office  is  filled  by 
vote  of  the  board,  and  the  trustee  serves  for  fife,  unless 
removed  by  operation  of  the  law.  There  is  no  annual 
election  of  directors  as  in  the  case  of  banks  of  discount, 
and  there  is  no  way  by  which  one  desiring  a  seat  on 
the  board  of  a  savings  bank  can  obtain  the  coveted 
position  except  as  he  is  selected  for  the  honor.  The 
power  of  money  does  not,  therefore,  count  as  an  asset 
in  such  a  matter  unless  it  be  that  as  a  man  of  wealth  he  is 
desirable  for  his  standing  in  the  community. 

In  the  event  that  the  savings  bank  should  fail,  as  few 
have  done,  the  trustees  cannot  be  held  fiable  unless 
they  have  grossly  transgressed  the  law.  Their  sole 
duty  is  to  operate  the  bank  for  the  benefit  of  the  deposi- 
tors, to  make  no  investment  not  sanctioned  by  the  law, 
and  to  use  due  care — the  same  degree  that  a  prudent, 
conservative  business  man  would  use  in  his  o\\ai  affairs. 
Doing  this  they  cannot  be  held  for  any  loss  that  may 
attend  the  operation  of  the  bank. 

The  second  noticeable  difference  between  the  two 
kinds  of  banks  fies  in  the  manner  of  investing  the  funds. 
In  the  bank  of  discount,  placing  the  loans  and  invest- 
ments is  within  the  discretion  of  the  board.  They 
may  lend  to  whomsoever  they  please,  restricted  only  as 
to  the  amount  which  must  be  proportionate  to  the  capi- 
tal and  surplus.  They  may  buy  the  bonds  of  the  United 
States,  foreign  governments,  cities,  states,  counties, 
railroad  companies,  pubfic  service  companies,  and  in- 
dustrial concerns.  In  fact  the  only  general  restriction 
is  that  they  shall  not  loan  upon  or  buy  their  own  stock, 
and  in  national  banks,  cannot  invest  in  the  stock  of 
corporations.  Their  field  is  as  broad  as  the  world. 
National   banks,   until   the   enactment   of  the   Federal 


12  THE  BUSINESS  MAN  AND  HIS  BANK 

Reserve  Act,  could  not  loan  on  real  estate,  but  banks 
in  country  districts  may  now  make  such  loans.  State 
banks,  however,  usually  have  the  right  to  make  mort- 
gage loans. 

This  is  not  to  say  that  mortgage  loans  are  not  good, 
for  as  a  matter  of  fact,  it  is  doubtful  if  any  form  of  in- 
vestment can  show  as  clean  a  record  as  loans  on  real  es- 
tate security.  They  take  front  rank  for  safety;  but  at 
the  same  time  are  considered  better  adapted  to  such 
institutions  as  savings  banks  and  insurance  companies, 
whose  investments  are  presumed  to  be  long  time.  The 
nature  of  their  business  is  such  that  they  can  safely  place 
their  money  in  long  time  securities;  for  the  deposits  of 
savings  banks  and  the  premiums  and  reserves  of  life 
insurance  companies  are  invested  moneys,  and  placed 
with  them  for  long  periods.  On  the  other  hand,  the 
deposits  of  banks  of  discount  are  in  the  main  subject  to 
demand,  and  fluctuate  more  than  do  the  deposits  of 
other  institutions.  Being  subject  to  demand  the  invest- 
ments that  follow  deposits  of  this  character  should  be  of 
short  duration  and  kept  in  a  liquid  form. 

Moreover  to  realize  upon  a  mortgage  loan  is  a  lengthy 
process,  attended  by  certain  legal  rules  that  must  be 
followed;  and  if  payment  is  forced  it  is  costly  and  slow. 

Savings  banks  have  always  been  regarded  as  invest- 
ment rather  than  lending  institutions.  They  do  not  as 
a  rule  lend  on  collateral  as  freely  as  banks  of  discount 
and  in  some  states  they  may  only  loan  upon  such  secur- 
ities as  they  are  allowed  to  buy. 

In  some  states  the  law  closely  restricts  the  character 
of  bonds  legal  for  savings  bank  investment,  and  as  a 
general  proposition  the  law  in  all  states  prescribes  the 
general  form  of  investment  for  such  institutions,  while 
leaving  the  banks  of  discount  free  agents  in  this  respect. 
In  all  states  savings  banks  may  invest  in  the  bonds  of 


TYPES  OF  BANKING  INSTITUTIONS  13 

the  United  States,  the  various  states,  cities,  towns,  coun- 
ties and  school  districts,  commonly  called  ''municipal 
bonds."  Railroad  bonds  are  everywhere  permitted  as 
an  investment,  but  in  some  juridsictions  the  law  is  more 
rigid  in  its  requirements  in  this  respect  than  in  others. 
Bonds  of  street  railway,  gas,  electric  and  power  compan- 
ies, ''public  utility  bonds,"  are  also  legal  in  many 
states  and  only  a  perusal  of  the  various  laws  will  make 
these  points  clear.  The  point  of  distinction  that  here 
obtains  is  the  fact  that  savings  banks  are  regulated  in 
their  investments  while  banks  of  discount  are  not.  All 
that  a  savings  bank  man  has  to  do  is  to  follow  the  law, 
while  the  manager  of  a  bank  of  discount  must  use  his 
discretion  and  his  judgment.  Which  process  develops 
the  higher  type  of  banker  can  easily  be  judged. 

We  have  a  third  distinction  in  the  contract  between 
the  bank  and  the  depositor.  In  the  bank  of  discount 
the  contract  is  that  the  bank  will  pay  the  checks  of  the 
depositor  properly  signed  by  him,  in  the  amount,  and  to 
the  party  named,  on  or  after  the  date  of  the  check. 
The  relation  is  that  of  debtor  and  creditor.  In  the 
case  of  the  savings  bank  the  agreement  is  to  return  the 
funds  upon  the  written  order  of  the  depositor,  or  to  his 
attorney,  on  production  of  the  pass  book.  This  pass 
book  contains  the  rules  under  which  the  deposit  is 
received  and  is  the  contract  betw^een  the  parties,  wliile 
in  the  bank  of  discount  the  pass  book  is  merely  a  memo- 
randum of  the  deposits.  It  is  not  a  contract.  In  accept- , 
ing  the  book  the  depositor  agrees  to  be  bound  by  the 
by-laws;  to  notify  the  bank  if  the  book  is  lost,  and  to 
claim  no  deposit  without  producing  the  book.  The 
bank  contracts  to  use  due  care  in  making  payment, 
but  nothing  more.  It  is  not  obhged  to  make  absolute 
identification,  as  is  the  bank  of  discount.  If  the  one 
presenting  the  pass  book  writes  a  signature  that  will 


14  THE  BUSINESS  MAN  AND  HIS  BANK 

pass  scrutiny,  answers  the  questions  as  to  age,  birthday, 
where  born,  father  and  mother's  name,  etc.,  the  savings 
bank  is  held  harmless  if  it  pays  to  the  wrong  party. 

The  savings  bank  also  agrees  to  invest  the  funds 
legally,  and  after  pa^dng  expenses  and  setting  aside  a 
reserve  for  the  protection  of  the  depositors,  to  distrib- 
ute the  excess  as  interest  to  the  various  depositors  as 
they  shall  become  entitled  to  it  according  to  the  rules  of 
the  bank.     It  is  a  trust  relationship. 

Building  and  Loan  Associations. 

Building  and  loan  associations  are  found  in  all  parts 
of  the  country,  and  are  especially  numerous  in  Penn- 
sylvania and  Ohio.  They  are  in  the  nature  of  savings 
banks,  being  mutual  investment  institutions,  the  in- 
vestment of  the  members  being  in  first  mortgages  on  the 
property  of  the  members.  Their  scheme  of  operation 
is  in  the  nature  of  a  compulsory  savings  bank.  The 
members  subscribe  to  a  certain  number  of  shares  of 
stock  and  agree  to  pay  for  them  by  monthly  deposits. 
Fines  are  imposed  for  failure  to  pay  as  agreed.  The 
funds  so  accumulated  are  loaned  to  the  borrowing 
members  and  the  profits  are  distributed  to  all  members. 
If  a  member,  for  instance,  wishes  to  build  a  home,  and 
has  saved  enough  to  purchase  the  land,  the  association 
will  loan  him  the  amount  necessary  to  build.  He 
then  subscribes  to  a  sufficient  number  of  shares  to 
repay  the  loan,  and  pays  a  stated  amount  each  month 
until  the  amount  deposited  plus  the  dividend  accumula- 
tions equal  the  amount  loaned,  when  the  loan  is  auto- 
matically cancelled.  The  ratio  loaned  is  often  as  high 
as  75  per  cent,  of  the  value  of  the  property.  The  proc- 
ess would  be  the  same  if  the  individual  were  to  agree 
with  a  sa\'ings  bank  to  deposit  a  certain  amount  monthly 
until  the  amount  the  bank  had  loaned  him  on  his  property 


TYPES  OF  BANKING  INSTITUTIONS  15 

was  repaid.  It  is  a  form  of  compulsory  saving  that 
has  been  most  beneficial  to  the  members.  The  divi- 
dends have  been  large  and  the  associations  as  a  rule 
well  managed  and  highly  regarded  in  banking  circles. 
The  money  deposited  by  non-borrowing  members  may 
be  withdrawn  by  giving  proper  notice. 

Mortgage  Companies. 

Mortgage  companies  are  institutions  that  lend  on 
real  estate  security  and  sell  their  mortgages  to  investors, 
with  a  guaranty  of  payment.  They  make  mortgage 
loans  in  the  same  manner  as  savings  banks  and  collect 
the  interest,  see  that  taxes  are  paid,  insurance  in  force, 
and  remit  the  interest  when  due  to  the  owner  of  the 
mortgage.  For  their  guaranty  of  payment  and  as 
compensation  for  their  services  they  deduct  one-half 
of  1  per  cent,  from  the  interest.  Thus  a  6  per  cent, 
mortgage  would  net  the  investor  53-^. 

Title  Companies. 

Title  companies  may  be  operated  in  connection  with 
mortgage  companies,  or  the  two  may  be  closely  affiliated, 
the  one  handUng  the  title  in  its  legal  aspects  and  the 
other  the  making  and  selling  of  the  mortgages.  The 
title  company  will  however  insure  the  title  to  any  prop- 
erty, irrespective  of  whether  it  makes  a  loan  on  it  or 
not.  It  certifies  to  the  quality  of  the  title,  and  agrees 
to  indemnify  the  owner  if  any  defect  is  subsequently 
found  either  by  curing  the  defect  or  by  making  reim- 
bursement. 

In  purchasing  real  estate  it  is  highly  essential  that  the 
title  be  in  the  seller,  else  the  buyer's  title  will  not  be 
good,  and  he  will  buy  nothing  but  a  lawsuit.  Likewise, 
in  making  a  loan  secured  by  real  estate,  it  is  necessary 
that  the  mortgagor  be  in  position  to  make  a  valid  mort- 


16  THE  BUSINESS  MAN  AND  HIS  BANK 

gage.  On  the  principle  that  you  cannot  pledge  what 
you  do  not  own,  it  becomes  necessary  to  ascertain  that 
the  pledgor  be  in  possession  of  the  thing  he  pledges. 
Therefore  in  all  real  estate  transactions,  the  title  is  the 
paramount  question.  On  the  day  this  paragraph  was 
written  there  was  rendered  a  judgment  that  clouds  the 
title  to  all  the  property  in  a  city  block,  and  the  defect 
dates  back  to  1848.  Such  defects  never  become  out- 
lawed, and  it  will  no  doubt  cost  the  property  owners  a 
goodly  sum  to  free  their  property  of  this  lien. 

Whether  the  lender  is  a  private  individual  or  an  insti- 
tution, the  title  should  be  safeguarded  wdth  all  care,  and 
the  best  safeguard  is  a  title  policy,  w^hich  certifies  to  the 
fact  that  the  title  has  been  examined  and  the  chain  is 
complete,  with  no  liens  other  than  as  stated,  and  the 
company  guarantees  to  cure  any  defect  that  may  sub- 
sequently arise. 

This  work  is  often  performed  by  lawyers,  but  as  a  rule 
they  only  state  an  opinion  and  do  not  guarantee  to 
defend  any  claim  that  may  be  set  up  that  affects  the 
validity  of  the  title. 

The  guaranty  of  titles  is  a  prerogative  of  title  com- 
panies and  they  may  be  found  in  all  large  cities. 

Safe  Deposit  Companies. 

Safe  deposit  companies  are  operated  in  conjunction 
with  banks  and  trust  companies,  or  they  may  be  inde- 
pendent concerns.  Frequently  safe  deposit  vaults  are 
part  of  a  bank's  equipment  and  incidental  to  its  other 
business.  This  form  of  banking  is  profitable,  inasmuch 
as  the  operating  costs  are  low.  After  the  vaults  are 
installed  it  merely  requires  the  services  of  a  few  atten- 
dants, who  keep  the  records  and  allow  box  renters  to 
enter  their  boxes.  The  one  danger  is  not  of  safe  breakers, 
for  the  vaults  are  usually  burglar  proof,  but  unauthor- 


TYPES  OF  BANKING  INSTITUTIONS  17 

ized  entry  into  a  box,  which  is  a  serious  matter.  The 
renters  of  boxes  or  their  duly  appointed  representatives 
are  the  only  ones  entitled  to  open  the  box;  and  where 
boxes  contain  millions  the  risk  is  obvious. 

Other  Banking  Institutions. 

We  have  also  private  banking  firms,  which  do  a  bank- 
ing business  similar  to  a  bank  of  discount,  and  private 
banks  which  are  licensed  and  operate  under  the  super- 
vision of  the  banking  departments  of  the  various  states. 
These  do  a  regular  banking  business  and  being  privately 
owned  are  more  or  less  free  lances  in  their  operations. 

There  are  also  the  great  bond  houses  which  buy  and  sell 
securities,  and  often  have  a  banking  department  con- 
nected with  their  bond  operations;  and  lastly  the  stock 
brokerage  concerns  which  are  dealers  in  stocks  and 
bonds,  but  do  not  do  a  banking  business. 

The  tendency  of  the  times  is  first  to  give  all  banks 
equal  powers,  so  that  no  one  class  shall  have  an  advan- 
tage over  another.  This  is  manifest  by  the  giving  of 
trust  powers  to  national  banks  and  state  banks,  thus 
putting  them  on  a  par  with  the  trust  companies;  and 
secondly  to  make  banking  in  the  nature  of  department 
store  operations,  so  that  the  customer  will  be  able  to 
deal  with  one  concern  in  many  ways.  This  tendency 
is  shown  by  the  fact  that  many  banks  are  now  combina- 
tions of  banks  of  discount,  savings  banks,  trust  compa- 
nies, bond  houses  and  safe  deposit  companies.  In  the 
banking  department  are  handled  the  usual  deposits 
and  checks,  loans,  and  discounts  that  pertain  to  business 
banking.  In  the  savings  department  are  handled  the 
savings  accounts,  or  interest  bearing  accounts.  In  the 
trust  department,  wills  may  be  drawn,  estates  managed, 
and  bonds  and  stocks  transferred  as  fiscal  or  transfer 
agent.     In  the  bond  department,  securities  are  bought 


18  THE  BUSINESS  MAN  AND  HIS  BANK 

and  sold  and  mortgages  placed;  and  in  the  safe  de- 
posit department  boxes  are  rented  and  valuables  stored. 
Therefore  the  modern  bank  can  do  for  an  individual 
all  that  he  needs  done,  Uke  the  department  store,  and 
it  can  serve  him  alive  or  dead. 


CHAPTER  III 
CHOOSING  YOUR  BANK 

In  choosing  the  bank  with  which  you  are  to  do  busi- 
ness, several  things  should  be  considered.  First  comes 
the  safety  of  the  bank.  You  want  the  funds  you  leave 
on  deposit  to  be  safely  kept,  wisely  invested  and  returned 
to  you  on  demand.  You  want  to  know,  therefore, 
something  of  the  soundness  of  the  institution  and  the 
character  of  the  management.  These  features  can 
in  a  large  degree,  be  determined  by  an  analysis  of  the 
bank's  statement  along  the  lines  laid  down  in  chapter 
21,  and  need  not  be  dwelt  upon  here. 

Where  it  is  a  choice  between  a  large  and  a  small  bank, 
select  the  larger,  for  the  reason  that  in  lending,  banks 
are  restricted  to  a  percentage  of  their  capital  and  sur- 
plus, and  unless  the  bank  has  a  large  capital  and  surplus 
it  may  not  be  able  to  grant  a  line  of  credit  commensurate 
with  your  needs.  You  also  obtain  the  distinction  of 
dealing  with  a  large  and  well  known  institution,  rather 
than  a  small  and  it  may  be  a  strugghng  one.  There 
is  a  certain  prestige  that  follows  an  account  with  a 
large  bank.  It  puts  you  in  a  good  crowd,  and  the  mere 
fact  that  a  well  known  bank  has  your  account  helps 
your  credit. 

In  an  examination  of  the  bank's  position,  note  par- 
ticularly the  capital,  surplus  and  undivided  profits. 
Inasmuch  as  the  loan  limit  is  usually  ten  per  cent,  of  the 
total  of  the  three  items,  your  direct  borrowing  capacity 
will  be  indicated  thereby.  The  surplus  and  profits 
reflect  the  character  of  the  bank  as  evidenced  by  earn- 
ings— the  final  test  of  good  management. 

19 


20  THE  BUSINESS  MAN  AND  HIS  BANK 

Another  point  having  to  do  with  the  choosing  of  a 
bank  is  its  personnel.  A  perusal  of  the  directorate  will 
give  you  a  fair  idea  of  the  management.  If  the  men  are 
men  of  business,  standing  well  in  the  community,  proven 
successes  in  their  respective  callings,  it  follows  that  the 
bank  will  be  conducted  along  progressive  lines.  But 
if  the  men  are  of  uncertain  worth,  doubtful  character, 
unprogressive,  unpopular  and  of  negative  personality,  the 
bank  will  quite  likely  take  on  the  same  character. 

The  best  test  in  this  respect  is  the  character  of  the 
administrative  officers.  If  they  carry  an  air  of  men 
who  know,  who  can  express  themselves  clearly,  talk 
intelUgently,  make  decisions,  have  opinions,  draw  con- 
clusions, and  "act  the  part,"  the  bank  will  surely  be  a 
reflection  of  the  men.  If  they  lack  the  qualities  that 
distinguish  men  of  affairs  and  education,  the  bank  will 
no  doubt  be  patterned  after  them.  How  true  these 
facts  are,  will  be  seen  by  appljdng  the  above  suggestions 
to  concrete  cases. 

Banks  have  Reputations. 

Banks  Uke  individuals  have  reputations.  If  the 
bank  is  known  as  easy  going,  slip  shod  in  its  methods, 
careless  about  Uttle  things,  easy  to  borrow  from,  un- 
kempt in  the  office,  indifferent  about  the  appearance 
of  the  stationery,  the  conduct  of  the  clerks,  the  service 
at  the  windows,  it  cannot  claim  to  be  a  well  managed 
bank,  however  profitable  it  may  be.  Banking  involves 
a  mass  of  detail,  each  detail  of  importance,  and  unless 
the  bank  is  careful  in  the  little  things,  it  cannot  com- 
mand the  respect  and  confidence  that  efficiency  pro- 
duces. You  can  often  judge  a  bank  by  the  appearance 
of  the  cashier's  desk,  and  you  can  often  judge  the  bank 
by  the  cashier  himself.  He  is  frequently  the  master 
mind. 


CHOOSING  YOUR  BANK  21 

Here  is  where  you  may  apply  your  business  psychol- 
ogy. Your  judgment  of  men,  your  first  impressions, 
the  cordiality  of  your  reception  when  you  open  your 
account,  will  indicate  the  character  of  the  bank  as  it 
reveals  itself  to  the  new  customer. 

You  want  your  bank  to  be  progressive,  as  you  aim  to 
be.  You  want  it  to  be  modern,  alert,  quick  to  see  an 
opportunity  and  to  use  it.  You  want  it  to  get  away 
from  tradition  and  move  with  the  times.  You  want 
modern  business  sense  appUed  to  your  proposition. 
You  want  the  banker  to  have  a  broad  vision,  to  see 
things  in  their  true  hght,  and  to  help  you  as  you  expect 
to  help  him.  His  very  attitude  may  retard  your  busi- 
ness development;  on  the  other  hand  it  may  help  you 
greatly. 

Progressive  Banks. 

You  want  a  safely-conservative — progressive  bank; 
a  real  bank,  that  endeavors  to  meet  the  customer  half 
way  and  that  works  for  the  benefit  of  both.  You  do  not 
want,  as  your  banker,  a  business  man  who  tries  to  run 
the  bank  the  same  as  he  runs  or  ran  his  business,  and 
who  judges  every  banking  proposition  by  the  rules 
he  has  established  in  personal  affairs.  One  of  this 
type  was  approached  for  an  advertisement  and  replied: 
"I  do  not  believe  in  advertising.  I  never  spent  a  cent 
for  advertising  in  my  life,  and  look  at  me!"- — ^A  nar- 
row minded  man,  running  an  unprogressive  bank!  Nor 
do  you  want  your  proposition  viewed,  as  an  automobile 
dealer  had  his  proposition  viewed,  by  another  would- 
be  bank  president.  The  dealer  handled  a  well  known 
make  of  car  and  sold  all  the  cars  he  could  secure.  He 
was  of  good  repute,  successful,  of  moderate  means,  but 
needed  bank  credit  to  handle  his  growing  business. 
He  suggested  to  the  president  of  his  bank  that  the 


22  THE  BUSINESS  MAN  AND  HIS  BANK 

bank  advance  80  per  cent,  of  the  factory  cost  of  the  car, 
and  he  would  advance  the  other  20  per  cent,  and  the 
freight,  leaving  a  margin  of  safety  of  over  40  per  cent, 
of  the  selUng  price.  He  would  give  the  bank  a  trust 
receipt  whereby  the  title  of  the  cars  would  be  in  the 
bank.  He  would  keep  them  covered  by  insurance, 
hold  them  in  storage,  and  sell  only  upon  the  release  of 
the  bank.  Without  the  said  release  he  could  not  give 
good  title  and  the  bank  could  claim  any  car  wherever 
it  might  be,  in  case  he  failed  to  secure  proper  release,  or 
pay  the  loan  upon  completion  of  the  sale.  It  was  a 
perfectly  safe  and  business-hke  proposition.  ''We  do 
not  run  an  automobile  business,"  said  the  banker,  ''we 
run  a  bank.  You  can't  do  business  with  us  on  any  such 
basis  as  that."  The  dealer  went  to  another  bank,  got 
all  the  credit  he  could  use  on  the  above  terms,  kept  a 
five  thousand  dollar  balance,  and  bought  and  sold 
hundreds  of  cars  without  a  single  miscarriage.  It  re- 
required  a  banking  mind  to  see  the  point  of  contact,  and 
the  would-be  banker  lacked  that  essential  thing. 

You  do  not  want  to  deal  with  a  bank  that  charges  a 
quarter  to  change  a  hundred  dollar  bill,  nor  one  that 
refuses  to  answer  an  inquiry  if  postage  is  not  enclosed; 
nor  one  that  charges  the  customer  for  every  telephone 
call  connected  with  his  account.  The  mental  processes 
of  such  bank  managers  are  too  small  to  merit  your 
patronage.  You  want  to  deal  with  a  bank  that  is  big 
and  broad  minded,  whole  hearted,  quick  to  grasp  a 
problem  and  alert  to  serve  its  people.  Good  will  is  a 
creature  of  slow  growth,  easily  created  if  the  service, 
the  quality  and  the  spirit  are  there.  It  is  invaluable 
once  it  is  established;  but  it  is  easily  lost  through  neg- 
lect and  inefficiency.  The  banker  who  does  not  realize 
how  important  an  asset  good  will  is  has  much  to  learn 
about  the  art  of  running  a  bank;  and  no  matter  how 


CHOOSING  YOUR  BANK  23 

good  his  other  assets  may  be  they  need  the  support  of 
the  good  will  asset  to  make  the  bank  a  really  great 
institution. 

You  have  a  right  to  expect  that  the  bank  will  take  a 
reasonable  risk  with  you — the  banker's  risk  against 
your  business  risk.  You  cannot  fortify  every  loan  by 
collateral  and  the  bank  has  no  right  to  expect  it.  You 
need  your  capital  in  your  business,  and  you  want  your 
ability,  your  integrity,  and  your  net  worth  to  be  con- 
sidered. And  the  banker  who  does  not  understand  the 
rules  of  credit  well  enough  to  apply  them  to  a  going 
business  is  a  good  one  to  leave  alone. 

Your  Bank  Balance. 

In  dealing  with  a  bank  it  must  be  remembered  that 
banking  is  expensive  business.  The  operating  costs 
are  high.  Banking  brains  are  costly  and  you  do  not 
want  to  deal  with  a  bank  that  is  not  well  managed. 
Clerk  hire  is  a  large  item  in  the  year's  budget  and  the 
labor  cost  is  constantly  increasing.  The  men  expect  to 
be  properly  compensated  and  the  times  demand  it.  A 
satisfied  man  is  safer  than  an  insured  one.  Stationery 
is  a  heavy  item  also,  for  the  books  of  record  are  expensive 
and  the  gratuitous  stationery  cost  is  large.  A  pocket 
check  book  now  costs  about  13  cents,  a  pass  book  from 
seven  to  fifteen  cents,  depending  upon  the  binding,  and  a 
check  book  with  the  customer's  name  on  the  end, 
numbered,  costs  about  $3.  All  this  is  furnished  free 
to  the  customers.  Add  to  this  the  taxes  of  various 
kinds,  income  tax,  real  estate  tax,  tax  on  bank  stock, 
profits  tax,  etc.,  and  the  interest  paid  to  depositors, 
and  you  will  readily  see  that  banking  is  not  all  profit. 
The  running  expenses  are  considered  moderate  if  they 
equal  one  and  a  half  per  cent,  of  the  deposits.  A  bank 
earning   a  hundred   thousand   a   year  gross,    will   ha\'e 


24  THE  BUSINESS  MAN  AND  HIS  BANK 

expenses  of  about  $30,000,  pay  as  much  in  interest 
and  should  have  an  earning  power  of  about  25  per 
cent,  net  on  a  capital  of  $100,000,  out  of  which  to  pay 
dividends,  meet  losses,  and  build  up  surplus. 

If,  therefore,  the  bank  is  to  make  money,  it  must  have 
a  line  of  desirable  balances  as  a  working  fund,  from  which 
to  produce  its  profits.  You  can  help  make  your  bank 
a  successful  institution  by  maintaining  as  large  a  bal- 
ance as  your  business  will  warrant.  If  the  bank  pays 
you  interest,  it  has  a  distinct  reason  why  the  balances 
should  be  ample;  and  if  it  does  not,  the  cost  of  opera- 
tion, the  conveniences  it  affords,  and  the  service  it 
renders,  should  be  duly  considered  and  a  balance  main- 
tained accordingly.  Nothing  will  make  you  a  desirable 
patron  so  much  as  a  satisfactory  balance;  and  nothing 
will  help  you  in  the  field  of  business  more  than  a  large 
cash  reserve.  You  and  the  bank  both  benefit  from  a 
reciprocally  profitable  account. 

What  is  a  Satisfactory  Balance? 

To  state  in  exact  terms  what  is  a  satisfactory  balance 
would  be  akin  to  describing  what  is  a  satisfactory  sale 
of  merchandise.  All  the  banker  asks  is  a  balance  upon 
which  he  can  make  a  profit,  however  small.  And  so 
many  elements  enter  into  the  determination  of  the  profit, 
that  only  by  close  analysis  can  the  desirability  of  any 
account  be  ascertained.  There  is  the  cost  of  stationery, 
as  above  mentioned,  the  labor  cost,  the  expense  of 
collecting  the  checks,  and  the  overhead,  as  the  charges 
against  the  account,  and  the  earning  power  of  the  money 
on  deposit  as  a  credit.  If  the  balance  is  sufficient  to 
earn  the  cost  of  handling  the  account,  plus  a  small  profit, 
the  banker  is  satisfied. 

As  a  general  rule,  an  account  against  which  a  limited 
number  of  checks  are  drawn,  say  one  hundred  a  year, 


CHOOSING  YOUR  BANK  25 

and  which  shows  an  average  balance  of  $500  would,  in 
most  banks,  be  considered  satisfactory,  provided  no 
interest  was  paid  on  the  balances.  If  it  were  an  active 
account,  with  daily  deposits  and  a  large  number  of  checks 
such  as  the  average  store  would  require  in  paying  its 
bills,  a  $1000  balance  would  be  sufficient.  But  if  the 
account  is  a  "borrowing  account" — that  is  to  say,  the 
firm  borrows  on  its  own  name  and  discounts  its  receiv- 
ables, a  balance  of  one  dollar  to  four  of  borrowed  money 
would  be  quite  sufficient.  If  any  hard  and  fast  rule 
were  to  be  laid  down,  it  would  be  the  latter  for  borrow- 
ing accounts,  leaving  the  adjustment  of  the  non-borrow- 
ing account  balances  to  the  judgment  of  the  particular 
bank.  It  would  be  easier  to  state  what  is  not  a  satis- 
factory account,  and  that  is  the  one  that  has  httle  or 
no  balance  and  deposits  are  checked  out  as  fast,  if  not 
faster,  than  funds  are  deposited.  A  great  many  bank 
depositors  look  upon  the  bank  as  a  philanthropic  insti- 
tution, operated  for  the  accommodation  of  the  public, 
and  conclude  that  if  they  cover  their  checks  so  that 
overdrafts  are  avoided,  they  have  done  all  that  the 
occasion  demands,  forgetting  the  fact  that  there  are 
certain  costs  attached  to  every  account  large  or  small, 
that  the  bank  desires  to  cover  from  the  earning  power 
of  the  balance.  In  this  respect  every  bank  is  a  law 
unto  itself,  and  only  by  consulting  the  bank  officials  and 
getting  their  views,  can  the  depositor  accede  to  the  wishes 
of  the  banker  and  so  treat  his  account  that  there  shall 
be  no  question  as  to  its  desirability. 

Interest  on  Daily  Balances. 

The  custom  of  paying  interest  on  daily  balances  is 
of  comparatively  recent  origin,  and  has  grown  as  the 
competition  for  new^  business  has  become  more  keen. 
It  started  in  the  large  city  banks  and  has  spread  to  all 


26  THE  BUSINESS  MAN  AND  HIS  BANK 

parts  of  the  country.  In  substance  it  means  that  the 
bank  pays  interest  on  the  actual  money  on  deposit 
for  every  day  it  remains  in  the  bank.  The  computation 
is  usually  made  monthly,  so  that  the  interest  compounds 
twelve  times  a  year.  In  many  banks  there  is  a  rule  that 
there  shall  be  a  certain  free  balance,  or,  to  put  it  dif- 
ferently, the  bank  will  pay  interest  on  all  but  a  certain 
amount,  as  $500.  The  figuring  of  this  interest  is  simple. 
The  bank  takes  the  balances  for  each  day,  includ- 
ing Sundays  and  holidays,  adds  them  together,  multi- 
plies by  the  interest  rate  and  divides  the  amount  by 
365;  or,  simply  find  the  interest  on  the  total  amount 
at  the  given  rate  for  one  day.  These  computations  are 
generally  made  during  the  last  two  or  three  days  of  the 
month,  so  as  to  keep  the  first  of  the  month  free  for  other 
pressing  matters.  Therefore  the  interest  is  computed 
from,  say  the  27th  of  the  preceding  month  to  the  27th 
of  the  current  month,  and  credited  on  the  first. 


CHAPTER  IV 
THE  POINT  OF  CONTACT 

Preceding  the  time  when  you  walk  into  "your  bank" 
and  open  account,  certain  influences  have  been  at  work 
which  have,  consciously  or  unconsciously,  directed  you 
there.  The  bank  may  have  been  a  progressive  adver- 
tiser, and  its  publicity  has  associated  banking  in  your 
mind  with  that  particular  bank,  so  that  when  you 
thought  of  a  bank  you  thought  of  that  bank;  if  so,  it  is 
to  be  commended.  It  may  have  given  such  service 
and  proven  so  helpful  to  another  depositor  that  the 
element  of  good  will  enters  the  transaction  and  a  mutual 
friend  has  brought  you  and  the  bank  together.  If  so, 
it  again  is  to  be  commended.  You  have  been,  it  may 
be,  a  casual  visitor,  and  have  liked  the  atmosphere  of 
the  bank.  It  may  be  finely  housed  and  this  has  im- 
pressed you.  You  may  have  simply  been  looking  for 
a  bank  and  drifted  in.  Whatever  the  influence  that  has 
resulted  in  your  appearance  at  the  new  account  desk, 
the  point  of  contact  is  established  when  you  write  your 
name  on  the  signature  card  and  receive  your  pass  book 
for  your  first  deposit.     It  is  now  your  bank  in  fact. 

The  work  of  opening  accounts  may  seem  merely  a 
clerical  task  and  such  it  is;  but  behind  the  simple  act 
of  issuing  a  pass  book  and  check  book,  there  lies  the 
personal  element.  The  banker  is  taking  your  measure. 
He,  like  yourself,  is  getting  a  first  impression.  He  is 
more  concerned  that  you  shall  be  a  desirable  customer 
than  he  is  about  the  size  of  your  first  deposit. 

27 


28  THE  BUSINESS  MAN  AND  HIS  BANK 

These  impressions  are  most  important,  for  they  con- 
nect you  with  the  bank  and  the  bank  with  you.  If  the 
reception  is  chilly,  indifferent,  and  to  all  appearances 
the  account  is  accepted  but  not  welcomed,  the  banker 
has  not  gotten  away  from  the  old  time  idea  of  banking, 
and  the  quicker  you  find  a  more  satisfactory  connection 
the  better. 

You  have  a  right  to  assume  that  j^ou  are  doing  the 
bank  a  favor,  for  have  you  not,  out  of  a  large  number 
of  banks,  selected  this  one  as  "your"  bank,  to  entrust 
it  with  your  business  secrets,  to  ''lay  your  cards  on  the 
table"  and  show  the  banker  who  and  what  you  are? 

If  at  this  time  he  asks  questions,  be  honest  and  tell 
him  all.  He  is  not  inquisitive,  but  simply  wants  to 
know,  for  only  as  he  knows  your  business  condition, 
your  methods,  your  markets,  your  profits,  can  he  in- 
telligently handle  your  business.  You  will  have  the 
right  to  refer  to  your  bank  as  to  your  credit  standing. 
The  bank  may  be  asked  to  report  your  condition  to 
Duns  and  Bradstreet  without  your  knowledge.  It 
can  only  do  you  justice  by  knowing  certain  things  about 
you.  If  you  make  a  statement  as  a  preliminary  to 
borrowing,  make  it  an  honest  one. 

When  you  interview  the  bank  man,  take  all  the  time 
you  need,  but  no  more.  Interviewing  is  part  of  his  job. 
Make  your  message  brief  and  to  the  point.  You  will 
easily  know  when  he  is  through  with  you,  and  that  is 
the  time  to  quit. 

Opening  a  New  Account. 

As  a  rule  banks  require  proper  introduction  as  a  pre- 
cautionary measure,  before  opening  new  accounts.  At 
this  time  the  rules  of  the  bank,  if  any,  as  to  minimum 
balances,  payment  of  interest,  etc.  will  be  explained.  In 
the  case  of  corporations,  partnerships  and  estates,  proper 


THE  POINT  OF  CONTACT  29 

authorization  for  opening  the  account  and  drawing  checks 
will  be  requii-ed.     Fortify  yourself  in  advance. 

Usually  two  or  three  signature  cards  are  required, 
so  that  the  signature  may  be  passed  upon  in  various 
departments,  such  as  the  teller's,  the  bookkeeping  and 
the  credit  department.  When  the  signature  card  is 
signed  and  authorization,  if  any,  is  in  proper  form, 
the  pass  book  will  be  made  out  and  check  book  furnished. 
Ordinary  check  books  are  furnished  free  by  all  banks, 
and  many  will  print  your  name  on  the  stub  free,  but 
the  latter  requires  about  two  week's  time. 

When  you  have  made  your  first  deposit,  the  bank 
becomes  your  debtor.  It  owes  you  the  amount  repre- 
sented by  your  credit.  You  have  the  right  to  draw 
as  many  checks  as  you  like,  in  sums  large  or  small,  and 
the  bank  is  bound  to  honor  them.  But  do  not  expect 
it  to  honor  overdrafts,  for  that  is  neither  good  banking 
nor  good  business,  and  it  hurts  your  standing  in  the 
bank  and  out.  Do  not  expect  the  bank  to  call  you  on 
the  wire  and  tell  you  your  account  is  short.  Keep  your 
check  book  carefully  figured  so  that  you  will  know  how 
your  balance  stands  at  all  times,  and  do  not  blame  the 
bank  for  the  mistakes  you  yourself  make. 

Inasmuch  as  the  great  bulk  of  bank  transactions  are 
by  check,  new  accounts  are  opened  with  cash  only  as 
the  exception  to  the  rule.  Where  cash  is  deposited,  the 
account  may  immediately  be  drawn  upon  and  the  bank 
assumes  no  risk  in  paying.  But  where  a  check  is  offered 
as  the  initial  deposit,  there  is  an  attending  danger  that 
all  well  managed  banks  guard  against.  The  check  may 
be  irregular,  payment  may  have  been  stopped,  it  may 
be  a  forgery,  or  the  account  short;  therefore  the  bank 
holds  back  the  checking  privilege  until  the  check  can 
be  collected,  unless  the  depositor  is  well  introduced, 
so  that  the  personal  equation  offsets  the  banking  risk. 


30  THE  BUSINESS  MAN  AND  HIS  BANK 

The  banking  fraternity  has  been  swindled  so  many 
times  through  check  deposits  that  to  cite  the  reasons 
why  a  bank  will  not  allow  checks  to  be  drawn  against 
uncollected  funds,  or  by  those  they  do  not  know,  would 
be  to  recite  the  criminal  side  of  banking,  and  catalogue 
the  losses  that  have  come  to  the  banks  through  check 
operations. 

Corporation  Accounts. 

In  dealing  with  corporations  and  partnerships  ex- 
treme care  must  be  used  to  comply  with  law  and  good 
banking  custom.  In  the  case  of  corporations  there 
must  be  a  resolution  by  the  board  of  directors  authoriz- 
ing the  opening  of  the  account  and  the  conditions  under 
which  checks  may  be  drawn.  It  is  a  principle  of  law 
that  a  corporation  can  act  only  through  its  officers. 
A  resolution  that  will  cover  the  ground  in  such  a  case 
is  as  follows : 

Offered  by  Mr.  X. 

"Resolved  that  the  treasurer  be  authorized  to  open  account  in 
the  Blank  National  Bank  in  the  name  of  this  company,  and  that 
the  said  bank  be  and  is  hereby  authorized  to  honor  checks 
drawn  against  funds  so  deposited  signed  by  the  treasurer  and 
countersigned  by  the  president,  until  this  power  is  rescinded  or 
altered" 

A  copy  of  the  resolution  should  be  lodged  with  the 
bank  and  certified  to  by  the  secretary  under  seal.  The 
officers  authorized  to  sign  will,  of.  course,  sign  the  bank's 
signature  cards. 

In  many  cases  the  finances  of  the  company  are  regu- 
lated by  the  by-laws  and  when  such  is  the  case  the 
bank  will  require  a  certified  copy  of  the  by-laws  and  a 
resolution  by  the  board  of  directors  that  is  in  keeping 
with  them.     This  is  the  bank's  warrant  for  dealing  with 


THE  POINT  OF  CONTACT  31 

the   corporation    according    to    established    terms,    and 
they  will  adhere  strictly  to  the  authorization. 

Partnership  Accounts. 

In  the  case  of  partnerships,  the  bank  will  require  a 
copy  of  the  partnership  agreement,  so  that  it  may  be 
protected  in  dealing  with  the  firm.  The  general  rule 
of  partnership  is  that  any  partner  has  the  power  to 
act  for  the  partnership  in  all  matters  affecting  the 
firm,  and  to  bind  all  members.  He  may  buy  and  sell 
goods,  sign  checks,  endorse  checks,  sign  promissory 
notes,  enter  into  contracts  for  the  firm,  and  in  all  part- 
nership dealings  bind  it  by  his  acts.  But  these  rules 
may  be  altered  by  the  partnership  agreement.  It 
may  be  provided  that  both  partners  must  sign  checks, 
whereas  ordinarily  either  member  may  sign  the  firm 
name  and  bind  the  partnership  by  his  signature.  The 
bank  will  want  to  know  what  the  agi'eement  between 
the  partners  is,  and  will  ask  that  the  checks  be  signed 
in  accordance  with  such  agreement. 

Fiduciary  Accounts. 

In  opening  accounts  with  executors,  administrators, 
trustees,  a  court  order  or  copy  of  the  letters  of  adminis- 
tration or  letters  testamentary  will  be  required.  In 
many  cases  the  account  with  a  fiduciary  requires  the 
countersignature  of  the  surety  company  that  furnished 
the  bond,  and  inasmuch  as  the  instructions  to  the 
bank  are  not  to  pay  without  its  indorsement,  this  will 
be  insisted  upon.  As  a  matter  of  fact  the  bank  runs 
its  largest  risk  in  dealing  with  corporations,  partnerships, 
estates,  guardians,  etc.,  and  quite  properly  seeks  to 
protect  itself  from  attack  because  of  irregularities 
possible  thi'ough  a  misapplication  of  such  funds. 


32  THE  BUSINESS  MAN  AND  HIS  BANK 

The  proper  way  to  sign  checks  on  corporation  accounts, 
is  as  follows: 

"The  A.  B.  C.  Co., 

by  A.  B.  X.  Treas." 


For  estates   etc., 
In  agency  account: 


"The  Estate  of  John  Smith 

Adam  Smith,  Executor." 

"John  Smith,  by 

Phihp  Smith,  Agent." 


The  signing  of  one's  name  with  the  suffix,  ''agent," 
''administrator,"  "treasurer,"  etc.  merely  indicates 
that  the  person  is  acting  in  a  representative  capacity  and 
does  not  bind  the  principal,  but  the  one  signing.  In  all 
such  relationships,  the  principal  should  be  indicated  with 
exactness,  so  that  the  act  may  bind  him  and  not  the 
signer. 

The  Pass  Book 

The  pass  book  of  a  bank  is  a  receipt  for  the  money 
and  checks  deposited.  It  is  not  an  absolute  receipt, 
but  is  in  the  nature  of  an  acknowledgement  of  having 
received  the  amounts  called  for  on  the  deposit  slip, 
subject  to  final  payment.  In  crediting  the  amount 
the  bank  says  in  substance:  "We  acknowledge  having 
received  the  amount  herein  stated.  The  receipt  of 
the  cash  is  absolute  and  may  be  drawn  upon  immediately; 
likewise  the  amount  represented  by  checks  drawn  on 
this  bank."  The  reason  for  the  latter  statement  is 
that  the  bank  has  the  opportunity  at  hand  of  verifying 
the'  checks,  the  signature,  the  date,  filling,  amount  on 
deposit,  and  other  such  details.  The  acceptance  on 
deposit  is  equivalent  to  cashing  and  the  credit  cannot 
be  rescinded.  But  as  for  checks  drawn  on  other  banks 
the  receiving  bank  has  no  such  opportunity,  and  says, 
"we  credit  conditional  upon  final  payment  by  the  drawee 


THE  POINT  OF  CONTACT  33 

bank."  If  the  check  is  not  paid  upon  presentation,  it  re- 
serves the  light  to  charge  the  amount  back  to  the  cus- 
tomer, and  this  it  will  do. 

This  right  to  charge  back  is  based  upon  the  warrantj'^ 
of  the  indorser,  by  which  warranty  he  agi-ees  that  if 
the  instrument  is  not  paid  upon  presentation,  he  will 
make  reimbursement  to  the  one  to  whom  he  gave  the 
check.  This  liability  is  covered  in  the  Negotiable 
Instruments  Law,  the  uniform  law  as  respects  checks, 
notes  and  bills  of  exchange  in  forty-nine  states  and  terri- 
tories within  the  United  States. 


CHAPTER  V 

THE  RECEIVING  TELLER 

The  individual  with  whom  the  banking  public  comes 
into  most  frequent  contact  is  the  receiving  teller.  He 
is  the  great  hopper  into  which  the  banking  grist  is  poured. 
He  is  the  receiving  reservoir  for  the  whole  bank.  His 
interests  and  the  depositor's  are  closely  allied  and  by 
working  in  harmony  with  him  and  fulfilling  his  wishes 
in  respect  to  the  details  of  the  deposits  both  will  be 
helped.  He  has  a  uniform  way  of  doing  things,  devel- 
oped from  time  to  time,  and  the  nearer  you  comply  with 
these  practices  the  more  expeditiously  will  your  trans- 
action be  handled.  You  can  make  the  day's  work 
smooth  and  accurate  and  quitting  time  early,  or  you 
can  throw  confusion  into  the  whole  banking  structure. 
The  following  rules  are  simple  and  easily  followed: 

1.  Always  take  your  book  in  making  deposits.  If 
you  do  not,  in  making  the  entry  subsequently,  the  de- 
posit ticket  must  be  obtained  to  verify  the  deposit. 
Banks  have  many  accounts  of  similar  names  and  credits 
are  often  made  to  the  wTong  account,  and  this  leads  to 
trouble  and  sometimes  loss.  For  your  own  protection, 
make  out  a  duplicate  ticket  when  the  book  is  not  pre- 
sented and  the  teller  will  stamp  it.  Place  it  in  your  book 
and  the  entry  will  be  made  when  the  next  deposit  is 
presented  at  the  window. 

2.  Keep  your  name  plainly  printed  on  the  cover.  Many 
books  are  used  a  long  time  and  the  name  becomes 
obliterated.     Needless   work   and  annoyance   is  caused 

34 


THE  RECEIVING  TELLER  35 

the  clerks  in  handling  such  books  and  a  little  care  in 
this  respect  will  greatly  help  the  force. 

3.  Always  be  sure  that  you  have  your  ticket  made  out 
as  you  want  the  deposit  credited.  Particularly  is  this 
true  if  you  have  two  accounts,  one  individual,  the  other 
as  "trustee,"  "agent,"  "executor,"  "special,"  etc. 
The  suffix  is  a  most  important  element  in  such  cases, 
and  be  sure  to  make  it  prominent.  The  posting  will 
be  made  from  the  ticket  and  not  from  the  entry  in  your 
book  or  your  intentions.  Therefore  get  your  ticket 
right.  A  certain  firm  had  a  firm  account  and  the  part- 
ners had  individual  accounts  in  the  same  bank.  One 
of  the  members  gave  his  wife  a  check  and  told  her  to 
deposit  it  in  the  bank.  She  did  so — to  his  account.  The 
firm  account  became  overdrawn,  checks  were  returned 
and,  greatly  exasperated,  the  depositor  threatened  to 
make  trouble  for  dishonoring  his  checks.  When  the 
deposit  ticket  was  shown  him  he  changed  his  mind. 
In  another  bank  there  were  two  accounts,  one  "Fred  S. 
Smith, "  and  the  other  "Franklin  S.  Smith."  The  possi- 
bility of  confusion  is  apparent  if  either  were  to  use  simply 
his  initials.     Therefore  use  care  in  making  your  ticket. 

4.  Arrange  the  deposit  in  the  same  order  as  the  ticket 
calls  for,  bills  right  side  up,  lying  one  way,  denomina- 
tions together;  checks  in  the  order  of  their  listing, 
properly  indorsed,  silver  and  gold  in  an  envelope. 

5.  Make  the  ticket  plain.  Omit  all  dollar  signs,  place 
the  figures  underneath  one  another  so  that  additions 
may  easily  be  made. 

The  deposit  ticket  is  an  important  document,  inas- 
much as  it  is  the  original  entry — the  first  evidence  of 
what  you  offered  for  deposit.  In  case  of  dispute  this 
will  be  offered  in  evidence.  These  records  are  seldom 
if  ever  destroyed.  The  ticket  is  your  safeguard  as  well 
as  the  bank's.     Treat  it  as  a  valuable  document. 


36  THE  BUSINESS  MAN  AND  HIS  BANK 

6.  Silver  if  in  quantity  should  he  wrapped  as  follows; 

Half  dollars  in  rolls  of  $10 

Quarter  dollars  in  rolls  of  $10 

Dimes  in  rolls  of  $5 

Nickels  in  rolls  of  $2 

Pennies  25  or  50  cents  as  the  bank  may  elect. 

If  bills  in  quantities  are  deposited,  strap  as  follows: 

50  I's  $     50 

50  2's  $  100 

50  5's  $  250 

50  lO's $  500 

50  20's $1000 

The  bank  will  furnish  the  proper  wrappers  for  both  coin  and  bills. 

7.  Coupons  that  are  presented  for  collection  must  be 
accompanied  by  the  proper  blanks  that  certify  as  to 
the  income  tax  features  of  the  coupon,  and  whether  or 
not  the  owner  claims  exemption.  All  banks  are  pro- 
vided with  these  blanks  and  will  furnish  them  upon 
request.  This  provision  does  not  apply  to  Liberty 
Bond  Coupons  which  are,  if  due,  treated  as  cash. 

Checks  without  Indorsement. 

Banks  will  receive  for  deposit  checks  that  are  drawn 
to  the  order  of  a  depositor  and  without  his  indorsement. 
While  the  risk  is  slight,  banks  do  not  favor  this  irregular 
practice,  although  it  is  sometimes  a  great  convenience. 
For  instance,  the  owner  of  real  estate  moves  out  of 
town  and  instructs  the  tenant  to  deposit  the  monthly 
rents  to  his  account.  The  tenant  may  draw  the  monthly 
check  to  the  order  of  the  depositor  and  indorse  it  "For 

deposit  to  the  credit  of ,"  and  the  bank  may  safely 

accept  the  same.  But  the  better  way  would  be  to  draw 
the  check  directly  to  the  bank  for  the  credit  of  the 
owner.  It  may  then  be  credited  to  the  account  of  the 
owner  in  safety  and  with  a  full  record  of  the  disposition 


THE  RECEIVING  TELLER  37 

of  the  check.  Under  the  rule  that  a  deposit  made  to  a 
certain  account  must  be  drawn  out  through  checks  pro- 
perly signed,  banks  allow  deposits  to  be  made  with- 
out the  indorsement  of  the  one  to  whom  the  check  is 
payable,  although  technically  speaking  the  indorse- 
ment is  lacking.  The  bank  in  substance  guarantees 
the  missing  indorsement. 

Banks  will  also  receive  deposits  for  credit  of  another 
bank.  For  instance,  a  firm  has  an  account  in  an  out 
of  town  bank  and  an  office  in  New  York.  It  may 
deposit  with  a  New  York  bank  for  credit  of  the  out  of 
town  bank.  The  New  York  bank  will  credit  the  account 
of  its  correspondent  and  advise  the  latter  of  the  credit. 
Thus  a  New  York  clothing  firm  has  an  account  in  a 
bank  on  Long  Island.  The  firm  will  make  deposits 
in  a  New  York  bank  to  the  credit  of  the  Long  Island 
bank,  and  the  Long  Island  Bank  will  treat  the  same  as  if 
made  over  the  counter,  and  allow  the  clothing  firm  to 
check  against  the  credit  as  if  made  at  the  window.  This 
is  a  frequent  custom. 

Keep  a  Record  of  Checks  you  Deposit. 

A  well  managed  bank  is  able  to  trace  practically 
every  check  that  it  handles.  It  does  so  by  taking  a 
memorandum  of  the  bank  drawn  on  in  one  department, 
and  from  whom  received  in  another.  Knowing  from 
whom  the  check  was  received  they  assume  that  the 
depositor  will  have  some  record  of  the  check  for  his 
own  protection;  and  knowing  on  which  bank  the  check 
was  drawn  they  know  what  course  it  took  when  it 
left  their  hands.  Your  books  should  therefore  be  so 
kept  that  you  can  trace  any  check  that  passes  through 
your  accounts. 

Checks  are  frequently  lost  in  the  mails  and  dupli- 
cates must  be  obtained  before  payment  can  be  had  and 


38  THE  BUSINESS  MAN  AND  HIS  BANK 

the  bank  will  ask  you  in  such  cases  to  obtain  a  dupli- 
cate. Your  cash  book  should  be  so  arranged  as  to  show 
your  receipts  by  check.  The  detail  is  entirely  optional 
with  yourself.  But  if  the  bank  should  inform  you  that 
a  check  for  $50  drawn  on  the  First  National  Bank  of 
Boston  has  been  lost,  they  have  the  right  to  expect 
that  you  can  identify  the  check.  They  cannot,  in  the 
volume  of  checks  handled,  ''photograph"  all  checks 
sent  out  and  must  depend  upon  their  customers  for 
cooperation  in  such  matters.  You  should  be  able  to 
turn  to  your  records  and  trace  any  check  you  deposit. 
You  cannot  expect  the  bank  to  keep  your  books  for  you. 
You  must  remember  that  the  bank's  chief  concern 
is  to  pay  your  checks  as  you  direct;  to  make  proper 
credits  and  debits  to  your  account;  to  render  proper 
statemeijts  from  time  to  time  covering  these  trans- 
actions. It  must  return  your  vouchers  and  show  you 
proof  of  its  figures;  but  further  than  this  it  cannot  go. 
When  the  accounts  are  reconciled  its  duty  is  done.  It 
has  kept  your  accounts  in  so  far  as  it  is  legally  or  morally 
obliged  to  do.  It  cannot  respond  to  a  test  such  as  this: 
A  customer  went  into  a  bank  and  asked  them  if  "they 
could  tell  him  what  the  amount  of  a  check  was  that  he 
drew  to  Mr.  J's  order  five  years  ago."  Assuredly  not. 
A  bank  keeps  no  records  of  those  to  whom  checks  are 
drawn.  It  merely  chronicles  dates  and  amounts.  And 
once  the  vouchers  leave  its  hands,  it  is  helpless  to  give 
further  information. 

The  Transit  Number  on  Checks. 

At  the  right  of  the  name  of  the  bank  on  most  checks,, 
there  will  be  found  a  small  number,  thus  "1-8."  This 
is  the  "transit  number"  of  the  bank  and  will  identify  it 
in  any  bank.  Years  ago  bankers  discovered  that  it  was 
necessary  to  record  the  names  of  the  banks  on  which 


THE  RECEIVING  TELLER  39 

checks  were  drawn  that  passed  through  their  hands. 
They  adopted  various  abbreviations,  but  even  these  were 
lengthy  as  compared  with  the  present  system  of  numbers 
Along  about  1910  the  American  Bankers  Association 
adopted  the  plan  of  giving  a  number  to  every  bank  in 
the  country,  such  number  to  be  permanent,  standard 
for  all  banks  and  to  follow  the  name  of  the  bank  on  its 
checks.  The  large  cities  were  given  the  low  numbers, 
and  the  clearing  house  number  was  added.  The  states 
were  then  given  a  prefix  number  and  all  banks  outside 
the  large  cities  were  allotted  numbers.  Thus  in  the 
example  above,  New  York  is  city  No.  1,  and  bank  No. 
8  is  the  National  City  Bank,  and  No.  8  is  its  clearing 
house  number.  Banks  in  New  York  State  outside 
New  York  City  are  numbered ''50 — . "  The  writer's 
bank  is  "50-494."  The  authentic  list  is  published 
yearly  by  Rand,  McNally  &  Co.,  and  provision  is  made 
for  listing  all  new  banks. 

It  is  advisable  to  keep  a  record  of  checks  received,  by 
maker,  amount,  datfe  received  and  the  transit  number. 
This  will  trace  any  check  without  difficulty.  The 
receiving  teller  in  some  banks  makes  notation  of  this 
transit  number  on  the  deposit  ticket,  and  the  party  from 
whom  the  check  was  received  is  recorded  in  the  outgoing 
letter  that  contains  the  check.  The  bank  therefore  has 
.  a  record  of  from  whom  checks  are  received  and  on  what 
banks  drawn. 

How  to  Detect  Counterfeit  Money. 

The  race  between  the  counterfeiter  and  the  govern- 
ment is  a  close  one  and  in  many  cases  the  former  leads; 
for  hardly  is  a  new  issue  of  money  put  out  than  it  is 
promptly  imitated.  The  counterfeiting  is  so  skillfully 
done  in  some  instances  as  to  deceive  even  experienced 
bank  men.     At  other  times  it  is  so  bunglingly  done  as 


40  THE  BUSINESS  MAN  AND  HIS  BANK 

to  be  apparant  to  even  the  casual  handler  of  money. 
Some  of  the  plates  used  are  photographs  of  genuine 
notes  and  these  are  as  a  rule  blurred  in  appearance. 
Others  are  printed  from  counterfeit  plates,  done  by  skilled 
engravers  and  are  the  most  dangerous.  Some  counter- 
feits are  raised  from  bills  of  low  denomination  to  larger 
ones,  by  pasting  figures  over  the  original  ones,  or  by 
pen  work. 

There  are  so  many  counterfeits  in  circulaton  that  to 
attempt  to  describe  each  with  its  defects  would  be  im- 
possible in  a  work  of  this  kind.  If  the  reader  is  inter- 
ested in  this  subject,  there  are  counterfeit  detecting 
agencies  that  furnish  the  banks  with  monthly  information 
of  new  counterfeits,  and  which  contain  a  description  of 
every  counterfeit  bill  in  circulation  in  this  country. 

There  is  one  general  test  that  may  be  applied  without 
study,  namely,  the  silk  thread  test.  The  paper  used 
by  the  Government  in  all  paper  money  has  scattered 
through  it  fine  silk  threads  of  various  colors.  This  paper 
is  made  under  a  secret  process  and  under  close  super- 
vision, so  that  it  never  can  be  had  by  anyone  for  any 
purpose,  and  is  absolutely  reserved  for  Governmental 
uses.  Look  for  these  threads,  and  inasmuch  as  they  are 
sometimes  imitated  by  ink  lines,  take  a  pin  and  pick 
them  out  of  the  paper.  Sometimes  two  pieces  of  paper 
have  been  used  with  the  threads  scattered  between  the 
two  pieces.     Such  bills  will  split  at  the  edges. 

The  general  appearance  of  the  bill  is  the  first  thing  to 
be  considered.  If  the  lines  are  clear  cut,  the  engraving 
sharp  and  distinct,  the  numbering  perfect,  and  the  silk 
threads  in  evidence,  the  bill  will  doubtless  be  found  to 
be  genuine.  But  if  any  point  is  doubtful,  take  it  to  the 
bank.  It  is  a  misdemeanor  to  knowingly  pass  counterfeit 
money  and  subject  to  heavy  penalty. 


THE  RECEIVING  TELLER  41 

Checks  to  Officers  of  Corporations. 

It  often  happens  that  an  officer  of  a  corporation  will 
draw  a  check  to  his  own  order  and  offer  the  same  for 
deposit  to  his  own  account.  Such  checks  are  drawn 
for  salaries,  expenses,  commissions  and  dividends.  As 
a  rule  the  bank  will  not  accept  such  checks  for  credit 
to  the  account  of  the  officer,  on  account  of  the  risk  that 
attends.  The  law  holds  the  bank  liable  in  such  cases 
in  the  event  that  the  money  so  drawn  is  an  abstraction, 
under  the  rule  that  the  check  carried  on  its  face  notice 
that  the  funds  were  being  diverted  and  the  bank  is 
charged  with  the  responsibihty  of  such  knowledge. 
The  only  safe  course  for  the  bank  to  pursue  is  to  require 
two  signatures  to  such  checks,  or  to  get  the  authoriza- 
tion of  the  corporation  to  such  transactions. 

The  same  rule  holds  true  in  partnerships,  and  accounts 
with  trustee,  executor,  administrator  or  guardian.  The 
law  being  as  it  is  and  lawmakers  being  unwilling  to 
change  the  statue  law  to  reUeve  the  banks  of  this  respon- 
sibihty, the  only  safe  course  for  the  bank  to  follow  is 
to  refuse  such  checks,  or  to  require  proper  authority 
to  pay  them  when  apparently  irregular.  Therefore, 
do  not  expect  the  bank  to  accept  them  and  do  not  put 
yourself  in  the  embarassing  position  of  having  them 
refused  or  their  regularity  questioned. 


CHAPTER  VI 

HOW  TO  INDORSE  A  CHECK 

In  presenting  checks  for  deposit,  the  depositor  is 
required  to  indorse  them.  Let  us  briefly  review  what 
this  means.  The  holding  of  a  check  duly  made  out  in 
your  name  or  indorsed  to  you  constitutes  you  the 
legal  owner  of  the  instrument  and  of  the  amount  rep- 
resented thereby,  unless  the  check  has  been  obtained 
by  fraud  or  for  an  illegal  consideration,  such  as  a  gam- 
bling debt.  In  order  to  get  this  title  out  of  yourself, 
you  must  indorse  it  by  writing  your  name  on  the  back 
in  one  of  the  several  ways  subsequently  discussed. 
By  so  doing,  you  transfer  your  rights  to  the  one  to  whom 
you  indorse,  and  at  the  same  time  assume  certain  ob- 
ligations. Assuming  that  the  indorsement  is  without 
qualification  and  consists  in  merely  writing  your  name 

"William  Smith" 

or 

"Pay  to  the  order  of  John  Brown 

William  Smith" 

you  warrant  to  all  subsequent  holders  in  due  course 
the  following: 

1.  That  the  instrument  is  genuine  and  in  all  respects 
what  it  purports  to  be. 

2.  That  you  have  good  title  to  it. 

3.  That  all  prior  parties  had  capacity  to  contract. 

4.  That  the  instrument  was  at  the  time  of  your 
indorsement  valid  and  subsisting. 

42 


HOW  TO  INDORSE  A  CHECK  43 

5.  You  engage  that  on  due  presentment,  it  shall  be 
accepted  or  paid,  or  both,  as  the  case  may  be,  according 
to  its  tenor,  and 

6.  That  if  it  is  dishonored  and  the  necessary  proceed- 
ings on  dishonor  are  duly  taken  you  will  pay  the  amount 
thereof  to  the  holder  or  to  any  indorser  who  may  be 
compelled  to  pay  it. 

The  former  rule  of  law  was  that  the  indorsement  of 
a  check  ''for  collection"  did  not  import  a  guaranty  of 
the  genuineness  of  all  prior  indorsements,  but  only  of 
the  agent's  relation  to  the  principal  as  stated  on  the 
check.  It  was  held  that  in  such  a  case,  the  collecting 
bank  was  not  liable  after  it  had  paid  the  proceeds  to 
its  principal,  though  a  prior  indorsement  was  a  forgery. 
This  rule  w^as  exceedingly  inconvenient  in  practice, 
and  hence  it  was  deemed  expedient  to  make  every  in- 
dorser a  warrantor  of  genuineness.  There  is  no  hard- 
ship in  this  rule  for  each  indorser  has  a  right  of  recourse 
against  all  prior  parties. 

The  old  rule  introduced  such  an  element  of  uncer- 
tainty in  banking  circles  that  the  clearing  house  asso- 
ciations throughout  the  country  adopted  rules  to  obviate 
its  effects,  and  by  concerted  effort  the  use  of  indorse- 
ments "for  collection,"  ''for  deposit"  etc.  has  been  in 
a  large  measure  discontinued. 

Different  Forms  of  Indorsement. 

The  proper  form  of  indorsement,  legally  and  practi- 
cally correct,  is  the  special  indorsement 

Pay  to  the  Order  of  Blank  National  Bank 

John  Jones" 

This  conveys  the  title  of  the  check  to  the  bank,  and 
without  the  bank's  indorsement  it  cannot  be  negotiated. 
If  the  check  is  lost  or  stolen,  it  cannot,  except  through 


44  THE  BUSINESS  MAN  AND  HIS  BANK 

forgery,  be  transferred,  and  you  are  fully  protected. 
Use  this  form  wherever  possible. 

There  are  other  forms  of  indorsement  used  infre- 
quently.    We  have  the  Qualified  Indorsement. 

"Without  Recourse 
John  Jones" 

This  form  transfers  the  check,  but  avoids  liability  there- 
on, and  should  be  used  where  it  is  necessary  to  indorse 
the  check,  but  without  any  liability  attaching  to  the 
indorsement,  except  (a)  that  the  instrument  is  genuine. 
(b)  that  it  is  in  all  respects  what  it  purports  to  be.  (c) 
that  the  indorser  has  good  title  to  it.  (d)  that  all  prior 
parties  had  the  capacity  to  contract;  (e)  and  that  the 
indorser  has  no  knowledge  of  any  fact  which  would 
impair  the  validity  of  the  instrument  or  render  it  value- 
less. 

This  form  should  be  used  when  you  do  not  wish  to 
guarantee  unqualifiedly  the  instrument.  The  words 
"without  recourse"  are  notice  to  the  party  taking,  that 
the  indorser  declines  to  be  held  liable  on  the  contract 
or  promise.     The  one  taking  does  so  at  his  own  risk. 

The  restricted  Indorsement  is  in  this  form: 

"Pay  John  Jones  only 
William  Smith." 

This  destroys  the  negotiability.     It  gives  the  indorsee 
the  right  to  receive  payment  and  to  bring  an  action 
on  the  instrument,  but  it  cannot  be  further  negotiated. 
It  stops  the  circulation  of  the  instrument. 
A  conditional  indorsement  is  like  this: 

"Pay  John  Jones 
Upon  Completion  of  his  contract. 
William  Smith." 


now  TO  INDORSE  A  CHECK  45 

This  of  course  is  conditioned  upon  the  fulfillment  of  the 
contract  and  is  not  common,  although  used  to  make  a 
conditional  transfer  and  to  postpone  payment. 
Another  indorsement  is  restricted  in  trust  as : 

"Pay  First  National  Bank 
FOR  account  of  William  Jones 
John  Smith." 

This  gives  title  to  the  bank  for  the  use  of  Jones,  and  is 
the  form  used  when  a  deposit  is  made  for  the  account 
of  one  who  cannot  make  the  proper  indorsement  in 
person.  It  is  called  ''third  party  indorsement"  and 
is  frequently  used. 


CHAPTER  VII 

BANK   CHECKS  AND  THEIR  COLLECTION 

Next  to  money  the  bank  check  is  the  most  common 
financial  instrument  handled  by  the  business  man,  and 
in  some  Unes  of  business  the  volume  of  check  trans- 
actions is  far  greater  than  the  cash  transactions.  The 
business  man  draws  large  numbers  of  checks  in  payment 
of  bills,  and  receives  large  numbers  in  settlement  of 
accounts.  His  chief  concern  is  to  take  only  good  checks, 
to  get  them  in  the  bank  as  soon  as  possible,  and  to  keep 
his  bank  balance  sufficient  to  cover  the  checks  he  draws. 
In  a  large  sense  checks  are  money  to  him,  and  he  pre- 
fers the  check  to  cash  on  account  of  the  ease  and  safety 
in  handUng.  He  knows  but  little  of  the  technique  of 
the  bank  check  and  its  legal  implications,  which  are  for 
the  most  part  Greek  to  him.  He  is  satisfied  to  know  that 
if  he  keeps  his  account  sufficiently  large  his  checks  will 
be  paid,  and  if  he  receives  only  good  checks  they  will 
be  paid.  All  else  is  a  mystery  to  him.  It  is  the  pur- 
pose of  the  next  two  chapters  to  give  the  proper  method 
of  drawing  and   protecting   checks. 

Checks  Transfer  Rights. 

The  common  idea  of  a  bank  check  is  that  it  is  an  order 
on  the  bank  to  pay  money;  and  this  it  is.  But  strictly 
speaking,  and  in  a  legal  sense,  it  is  the  transfer  of  a  right. 
We  have  seen  that  when  the  bank  opens  an  account 
it  gives  the  customer  the  right  to  withdraw  his  funds  on 
demand.  This  is  true;  but  the  right  more  often  takes 
the  form  of  a  transfer  of  the  right  to  demand  money  than 

46 


BANK  CHECKS  AND  THEIR  COLLECTION  47 

it  does  the  actual  payment  of  the  funds.  As  a  rule 
the  holder  of  a  check  wants  to  own  this  right  rather  than 
to  have  possession  of  the  cash  itself.  To  illustrate: 
A  has  a  bank  account  and  draws  his  check  to  B.  B, 
not  wishing  to  avail  himself  of  the  right  to  demand  cash, 
passes  his  right  on  to  C.  C,  in  turn,  passes  the  right 
.over  to  his  bank,  and  from  bank  to  bank  the  right  to 
demand  payment  is  transferred  until  it  is  finally  cashed 
in.  What  the  business  man  wants  in  connection  with 
his  bank  account  is  not  a  redemption  of  the  checks  he 
draws  in  cash,  but  the  honoring  of  his  orders  to  trans- 
fer his  rights  to  others.  This  transfer  of  rights  cancels 
debts  just  as  truly  as  if  done  with  money,  and  is  a  much 
safer  and  cheaper  way  of  meeting  obligations. 

Importance  of  Bank  Checks. 

The  importance  of  the  bank  check  need  not  be  dwelt 
upon  at  length.  It  is  such  a  vital  part  of  our  com- 
mercial life,  that  to  get  along  without  it  would  be  like 
going  back  to  the  stage  coach  and  the  tallow  candle. 
The  chief  virtue  of  the  bank  check  is  its  convenience. 
In  the  payment  of  a  bill  or  the  transfer  of  credit,  it  is 
the  premier  instrument  of  the  business  world,  and  no 
matter  how  far  distant  the  creditor  may  be,  or  how  large 
or  small  the  sum  involved,  a  few  words  on  the  appro- 
priate blank  are  all  that  is  necessary  to  start  the  banking 
machine  moving.  This  machinery  of  banking  is  finely 
organized,  never  sleeps,  and  rarely  misses.  It  consists 
of  men  and  women,  adding  machines,  typewriters  and 
the  mails.  The  mechanical  part  rarely  breaks  down, 
and  only  when  the  human  machine  slips  a  cog  does 
friction  result  and  the  check  collecting  system  cease  to 
function  perfectly. 

Checks  are  now  so  widely  used,  so  well  known,  and 
so  rarely  bad  that  they  have  to  a  great  degree  become 


48  THE  BUSINESS  MAN  AND  HIS  BANK 

the  circulating  medium  of  the  country.  They  differ 
from  bank  notes  in  that  the  latter  are  promises  by  the 
bank  to  pay,  while  the  bank  check  is  an  order  on  the 
bank  to  pay.  The  certified  check  assumes  the  same 
dignity  as  the  bank  note,  being  Ukewise  a  promise  by 
the  bank,  but  differs  from  the  bank  note  in  that  it 
lacks  the  fine  engraving  and  the  uniformity  of  denomi- 
nation. The  check  is  much  cheaper  to  create  than  the 
bank  note,  inasmuch  as  the  paper  need  not  be  so  costly, 
nor  the  printed  matter  so  carefully  done,  and  the  me- 
chanical process  is  less  elaborate.  At  the  same  time  it  is 
more  risky  and  more  easily  counterfeited  or  altered. 
A  very  small  percentage  of  the  great  mass  of  bank 
checks  in  circulation  are  not  paid  upon  presentation 
and  a  bad  check  is  the  exception  and  not  the  rule. 

Why  Bank  Checks  should  be  Collected. 

The  same  fundamental  reasons  that  prompt  the  bank 
to  collect  its  checks  obtain  in  the  case  of  the  business 
man.  No  bank  holds  checks  over.  They  are  imme- 
diately sent  forward  for  payment.  When  the  day's 
work  is  done  every  check  received  during  the  day  is 
in  process  of  collection.  The  checks  drawn  on  itself 
are  charged  to  the  drawers.  Out  of  town  checks  are  in 
the  mails,  others  are  ready  for  the  messenger  to  take 
out  the  next  morning,  and  others  are  ready  for  the  clear- 
ing house  exchanges.     Let  us  see  what  these  reasons  are. 

By  law  all  banks  are  required  to  carry  a  reserve, 
that  is,  a  certain  proportion  of  their  deposits  in  cash  or 
in  reserve  depositary  banks.  A  legal  depositary  is  a 
bank  selected  by  the  board  of  directors  and  approved 
by  the  Comptroller  of  the  Currency  or  the  state  super- 
intendent of  banks,  as  a  lawful  bank  wherein  a  certain 
part  of  its  available  funds  may  be  kept.  Such  deposits 
may  be  counted  the  same  as  cash  in  figuring  the  re- 


BANK  CHECKS  AND  THEIR  COLLECTION  49 

serve.  Therefore,  a  check  to  be  of  any  practical  value 
to  the  bank,  must  be  turned  into  cash  or  into  a  balance 
at  the  reserve  bank.  Until  this  is  done  it  is  immaterial 
how  good  the  maker  is  or  how  large  or  strong  the  bank 
drawn  on  may  be.  A  check  can  be  of  value  only  in 
one  of  two  places — the  bank's  vault  in  the  form  of 
money,  or  in  the  depositary  bank  as  a  credit  payable 
on  demand.  Again,  the  maker's  account  may  not  be 
good,  or  the  maker  may  stop  payment  on  the  check, 
thus  nulUfying  its  effect,  or  the  maker  of  the  check  may 
die  before  the  check  is  presented.  It  is  then  automati- 
cally cancelled  and  the  holder  must  look  to  the  estate 
for  payment.  Therefore  prompt  action  is  desirable  in 
order  to  avoid  these  possibilities.  And  finally  the  maker 
may  go  into  bankruptcy,  when  the  check  is  automati- 
cally cancelled  and  the  holder  has  only  a  claim  against 
the  bankrupt's  estate. 

Therefore  if  you  work  on  the  theory  that  the  maker 
is  going  to  die  or  is  contemplating  bankruptcy,  or  the 
bank  is  going  to  fail,  or  the  account  is  barely  sufficient 
to  pay  your  check,  and  make  due  haste  to  deposit  your 
checks  promptly,  you  will  do  all  that  the  law  requires 
and  all  that  good  business  can  suggest. 

Add  to  the  foregoing  the  legal  reason  that  a  check 
should  be  presented  for  payment  during  the  next  busi- 
ness day  after  its  receipt,  if  the  bank  is  in  the  same  place; 
or  if  the  bank  is  in  a  distant  place,  the  check  must  be 
started  on  its  way  for  collection  during  the  next  business 
day,  and  we  have  several  practical  reasons  why  checks 
should  not  be  treated  as  cash,  but  should  be  deposited 
promptly. 

The  business  man  should  follow  the  bank  rule,  for 
he  wants  to  reduce  his  checks  to  a  working  balance 
in  his  bank,  against  which  he  may  draw  checks;  and 
inasmuch  as  most  banks  will  not  pay  against  checks 


50  THE  BUSINESS  MAN  AND  HIS  BANK 

until  they  are  collected,  he  should  deposit  his  checks 
promptly  if  he  is  to  have  quick  use  of  the  funds  which 
they  represent. 

Perhaps  the  most  wonderful  thing  about  American 
banking  is  the  smoothness  of  the  working  of  the  check 
redemption  machine.  When  it  is  considered  that  some 
banks  in  New  York  handle  from  25,000  to  50,000  checks 
every  day  and  in  the  New  York  Federal  Reserve  Bank 
upwards  of  200,000  checks  go  through  daily — coming  in 
in  the  morning  and  going  out  at  night  with  scarcely 
an  error  in  all  the  mass  of  figures,  the  importance  of 
the  bank  check  becomes  apparent.  There  are  about 
30,000  banks  in  this  country.  Allowing  each  but  100 
checks  a  day- — a  low  estimate— would  make  three 
million  checks  handled  every  day  by  the  banks  of  this 
country. 

How  Checks  Should  be  Drawn. 

There  are  certain  practical  suggestions  relative  to 
bank  checks  that  will  help  in  the  day's  work,  both  for 
the  bank  and  the  maker  of  the  check.  The  first  is  to 
date  your  checks.  This  might  seem  to  be  an  unneces- 
sary statement;  but  many  checks  circulate  without 
date  and  open  the  question  in  the  minds  of  those  who 
are  unacquainted  with  their  rights  as  to  what  to  do. 
If  such  a  check  comes  into  your  hands  you  have  the 
right  to  insert  the  date,  if  known,  and  if  not,  the  date 
of  its  receipt  by  you. 

The  next  suggestion  is  to  start  the  filling  of  the  check 
well  to  the  left,  write  plainly,  use  plenty  of  ink,  and 
fill  in  the  unused  portion  with  a  wavy  line.  Make  the 
figures  close  up  to  the  dollar  sign,  omit  all  dollar  signs 
of  your  own,  and  make  the  figures  so  plain  that  there 
can  be  no  question  as  to  the  amount,  even  by  a  hurried 
inspection. 


BANK  CHECKS  AND  THEIR  COLLECTION  51 

Next,  sign  your  name  in  a  plain  hand.  Do  not  flour- 
ish. Omit  underscoring.  "Adopt  one  form  of  signature 
and  adhere  to  that  form  until  it  becomes  second  nature. 
Some  men  quite  properly,  have  not  changed  their  sig- 
nature in  many  years. 

And  finally  do  not  use  forms  of  other  banks.  It  is 
a  frequent  practice,  when  without  a  proper  blank, 
to  cross  out  the  name  of  one  bank  and  insert  the  name 
of  the  maker's  bank.  Banks  do  not  favor  this  practice, 
and  if  it  must  be  done,  initial  the  alterations,  or  have 
all  the  work  in  one  handwriting.  The  better  way  is 
to  draw  a  form  of  draft  on  the  bank.  These  forms  can 
be  had  at  any  stationery  store  and  all  banks  have  blank 
draft  forms.  All  first  class  hotels  have  blank  check 
forms  for  the  use  of  guests.  These  can  be  filled  in  for 
any  bank. 


CHAPTER  VIII 
PROTECTION   OF   BANK   CHECKS 

According  to  law,  a  bank  is  bound  to  know  the  signa- 
tures of  its  depositors,  and  is  presumed  to  know  the 
authorized  signature  of  each  depositor  on  its  books. 
If  it  pays  a  check  on  which  the  signature  is  forged, 
the  bank  cannot  charge  the  amount  to  the  depositor 
unless  the  latter  has  been  negligent,  or  a  party  to  the 
fraud.  It  makes  no  difference  how  cleverly  the  for- 
gery has  been  done,  or  whether  good  faith  and  due  care 
were  exercised  in  making  payment,  the  rule  applies. 
The  forgery  may  be  so  nearly  genuine  as  to  deceive  even 
the  depositor  himself,  nevertheless,  the  bank  is  liable. 
In  other  words,  the  bank  that  has  paid  a  forged  check 
cannot  cast  the  burden  upon  the  depositor  whose  check 
it  purported  to  be. 

The  relation  of  a  bank  and  its  depositor  is  that  of 
debtor  and  creditor,  and  the  implied  contract  of  the 
bank  is  to  the  effect  that  it  will  disburse  the  money 
standing  to  the  credit  of  the  depositor  only  on  his  order, 
and  in  conformity  with  his  directions.  When  it  makes 
payment  on  a  forged  instrument,  it  is  held  to  have  paid 
out  its  own  funds,  and  cannot  charge  the  amount  against 
the  depositor,  unless  it  can  show  a  right  to  do  so  on  the 
doctrine  of  estoppel,  or  because  of  negUgence  which 
is  chargeable  to  the  depositor. 

This  risk  of  forgery  is  apparent,  and  is  one  of  the 
danger  spots  in  banking,  the  burden  being  altogether 
upon  the  bank.  The  business  man  should,  therefore, 
use  due  effort  to  minimize  this  risk,  by  protecting  his 

52 


PROTECTION  OF  BANK  CHECKS 


53 


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SUPERINTENDENT'S        0>  T  r-A^t :( A  j 

ACCOUNT  °"  «--U-.-C.^^:.X.L^L^'>^ 


Fig.  3. — Number  chauged  from   14215  to  1421;  payee  changed  from  J.  A. 
Pittnjan  to  Sara  Spivy;  amount  raised   from  $15.37  to  $48.00. 


54  THE  BUSINESS  MAN  AND  HIS  BANK 

checks,  never  giving  them  to  strangers,  keeping  his 
check  book  under  control,  and  never  signing  checks 
in  blank,  for  it  is  possible  that  such  acts  may  deprive 
him  of  his  right  to  recover  on  a  forged  signature. 

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Z  O    '  ' '^-^    '       /-^       (     ^  y  •  r^T—7/^i  .  Kj.  I  . 

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Fig.  4. — Number  changed  from  14201  to  1420;  amount  raised  from  $11.60 

to  $47.90. 

Kiting  Checks. 

There  is  a  custom,  more  or  less  common,  but  highly 
dangerous,  known  in  banking  circles  as  ''kiting  checks." 
It  simply  means  exchanging  checks  between  parties, 
with  or  without  value  back  of  them.  Anyone  who  stoops 
to  this  practice  is  carrying  on  a  suicidal  operation,  in 
so  far  as  credit  is  concerned.  In  fact,  it  is  fatal  in  its 
consequences.  It  requires  a  shrewd,  far  sighted,  and 
careful  set  of  individuals  or  firms  to  carry  on  a  scheme 
of  this  kind,  and  it  is  sure  to  be  detected  by  the  banks  in 
due  time,  and  the  time  depends  upon  the  cleverness 
of  the  plan  and  the  administration  of  the  banks.  Let  us 
see  the  basic  principles  of  kiting  by  illustration.  A, 
being  short  of  money,  and  having  a  bank  account  in 
Pennsylvania,  says  to  B,  havmg  a  bank  account  in 
Northern  New  Jersey,  ''Give  me  your  check  and  I  will 
give  you  mine.  I  will  have  money  in  the  bank  before 
my  check  gets  back  and  it  will  be  paid."  They  therefore 
exchange  checks  in  the  same  amounts,  which  is  one 
of  the  symptoms  of  kiting.     A  deposits  B's  check  in 


PROTECTION  OF  BAXK  CHECKS  55 

Pennsylvania  and  B  deposits  A's  check  in  New  Jersey. 
It  will  be  several  days  before  the  checks  can  get  back 
to  the  banks  drawn  on,  and  in  the  meantime,  each  has 
had  the  use  of  the  money  represented  thereby,  unless 
the  bank  is  careful  not  to  pay  against  uncollected  funds. 
And  if  it  does,  and  the  check  comes  back  short,  or  worth- 
less, the  bank  is  out.  The  longer  the  distance  between 
banks,  the  more  dangerous  is  the  practice. 

There  is  another  method  of  kiting,  by  using  two  banks, 
the  same  individual  having  accounts  in  both.  In  such 
a  case  he  will  deposit  a  check  on  bank  A  to  his  account  in 
bank  B  to  meet  checks  drawn  on  bank  B  in  the  regular 
course  of  business.  It  is  easily  detected.  For  instance, 
the  teller  has  several  checks  of  a  certain  individual 
for  payment,  and  finds  the  account  short.  He  looks 
up  the  deposit  for  the  day,  he  finds  that  the  maker  of  the 
checks  has  deposited,  among  other  checks,  a  check  on 
his  account  in  another  bank.  He  has  thus  ^'covered" 
his  checks.  If  the  teller  calls  up  the  second  bank  and 
finds  the  account  there  to  be  short,  it  is  a  pure  case  of 
kiting — "stalling"  for  time; — and  time  is  the  essence 
of  kiting.  All  may  go  w^ell  for  a  time  in  the  latter  in- 
stance, and  the  kited  checks  paid  in  due  course,  but  once 
tlie  banks  send  such  items  direct  and  not  by  a  round-a- 
bout method,  the  game  is  at  an  end.  In  fact  it  cannot 
long  continue  in  any  bank,  and  is  sure  to  lead  to  trouble. 
The  following  case  of  check  kiting,  intricate  and  care- 
fully planned,  was  discovered  and  ended  by  the  author 
in  March,  1920. 

The  characters  were:  Jones,  a  clerk  in  a  bank  in  New 
York;  Brown,  the  president  of  a  corporation;  Smith, 
treasurer  of  the  corporation,  and  several  clerks  in  the 
corporation  used  as  dummies.  Jones  had  two  bank 
accounts,  one  in  New  Jersey  and  one  in  a  bank  on  Long 
Island.     Brown  had  an  account  in  another  bank  on  liong 


56  THE  BUSINESS  MAN  AND  HIS  BANK 

Island.  The  corporation  had  an  account  in  a  New 
Jersey  bank.  Jones  was  approached  by  his  brother- 
in-law  who  was  a  clerk  in  the  employ  of  the  company, 
who  said  the  company  needed  money.  They  would 
make  it  worth  while  to  him,  if  he  would  draw  his  check 
to  Smith  for  $4000,  which  he  did,  on  his  New  Jersey 
bank.  Brown  thereupon  drew  his  check  on  his  Long 
Island  bank  to  the  order  of  Jones,  which  Jones  deposited 
in  his  own  bank  in  New  York,  to  the  credit  of  the 
New  Jersey  bank,  on  which  he  drew  the  first  check, 
and  which  had  an  account  with  Jones'  bank.  Being 
advised  that  they  had  been  credited  in  New  York, 
the  New  Jersey  bank  paid  Jones'  first  check.  Brown's 
check  on  Long  Island  to  Jones  came  back  ''short," 
thus  cancelling  the  credit  in  New  York.  Jones  then 
brought  his  Long  Island  bank  into  play  and  gave  his 
own  bank  a  check  on  his  Long  Island  bank  to  cover 
Brown's  checks  which  had  come  back.  To  cover  the 
check  in  Jones'  Long  Island  bank.  Brown  gave  Jones 
three  checks  on  Bro\^^l's  bank,  which  also  came  back 
"short."  Having  started  the  game  it  could  not  be 
stopped,  and  so  Jones  began  to  draw  checks  to  the  order 
of  the  dummies  in  the  corporation  office,  which  were 
deposited  by  the  corporation  in  its  New  Jersey  bank. 
They  in  turn  gave  Jones  their  checks  on  New  Jersey 
which  Jones  deposited  in  his  Long  Island  bank.  Thus 
they  switched  back  and  forth  for  about  two  weeks, 
Jones  getting  from  the  corporation  several  checks  a  day 
(to  make  them  appear  regular)  which  he  placed  to  his 
credit,  while  he  drew  several  checks  daily  to  the  order  of 
the  dummies  (to  make  them  appear  regular)  which  were 
deposited  to  the  credit  of  the  corporation.  When  the 
fraud  was  detected,  by  inquiry  as  to  whether  Jones  was 
drawing  on  uncollected  funds  (which  simply  meant, 
ascertaining  if  the   checks  Jones   had   deposited  were 


PROTECTION  OF  BANK  CHECKS  57 

honored)  it  was  discovered  that  these  checks  were  passing 
between  the  same  parties  daily,  and  hi  practically  the 
same  amounts.  The  balance  to  the  credit  of  the  cor- 
poration m  New  Jersey  consisted  of  $8000  of  Jones' 
checks  on  Long  Island  which  were  bad,  and  Jones  had  a 
credit  of  $10,000  in  Long  Island  consisting  of  the  cor- 
poration's checks  on  New  Jersey  which  were  also  bad. 
These  bad  checks  were  in  the  mails  for  collection, 
and  had  not  had  time  to  get  back  to  the  banks  in  which 
they  were  deposited.  In  consequence,  one  bank  had 
paid  out  $2500  and  the  other  $4000,  for  which  they 
held  bogus  checks.  In  this  operation  extending  over 
a  period  of  two  weeks,  not  a  single  dollar  of  real  money 
existed. 

Forgery. 

The  law  nowhere  requires  the  maker  of  a  check  to  so 
draw  it  that  it  cannot  be  altered,  and  there  is  no  device 
that  the  law  says  is  absolute  protection;  but  it  does 
require  the  maker  to  use  due  care  in  filling  the  check 
so  that  alteration  or  forgery  may  not  be  invited.  The 
rules  before  given,  if  followed,  will  be  viewed  as  using 
due  care  in  the  drawing  of  a  check  and  protect  the 
maker  from  the  charge  of  negligence. 

There  has  been  a  constant  and  interesting  race  be- 
tween the  check  raiser  and  the  check  protector.  The 
development  of  protecting  devices  would  be  an  interest- 
ing study.  Twenty-five  years  ago  there  was  simply  the 
device  that  scarred  the  paper  over  the  figures  as  shown 
on  pages  61  and  71.  The  forger  beat  this.  Then 
came  the  machme  that  punched  the  figures  in  a  series 
of  little  holes  (see  illustration,  page  58).  These  were 
easily  filled  with  the  same  perforated  cuttings  and  the 
altered  amount  cut  over.  Then  came  the  machine  that 
cut  the  figures  out  (see  cut,  page  63).     It  became  easy 


58  THE  BUSINESS  MAN  AND  HIS  BANK 

to  take  paper  of  the  same  tint,  cut  the  same  figures 
with  a  duplicate  machine  and  paste  them  in,  cutting 
the  new  figures  over  them.     Then  came  the  machine 

that  wrote,  ''Not  over hundred  Dollars,"  struck 

the  figures  into  the  paper  and  filled  the 
,•;.*  ••  •  ,;  •.%•••    ragged  edges  with  indelible  ink.     Such 
*••*  •••*•  ••••    •      a  check  was  difficult,  but  not  impossi- 

FiG.  5.— Second    ble,   to  alter.      Then   came  the  check 

method  of  protecting  .,  ,i      ,  -j        ii  ,,..■, 

checks.  writers  that  write  the  amount  of  the 

check  in  the  writing  space,  cut  the 
words  into  the  paper  and  inject  the  indelible  ink  into 
the  fibre.  There  is  also  a  similar  machine  that  writes 
the  words  and  at  the  same  time  scars  the  paper  where 
the  payee's  name  is  written  so  that  alteration  of  amount 
or  name  is  almost  impossible. 

NOT  OVER  imTfYDOilARS  $30$ 

Fig.   6. — Work  of  the  "  Protectograph. 

There  are  several  brands  of  ''safety  paper"  on  the 
market  that  protect  checks  to  a  considerable  extent, 
although  not  absolutely.  These  papers  have  a  thin 
coating  of  sensitive  ink,  and  any  use  of  acids  immediately 
destroys  the  surface  and  makes  the  alteration  "blotchy." 


Pay  to  the 

ORDER  OF' 


Fig.   7. — Work  of  the  "Check  Writer." 

They  are  to  be  recommended,  but  are  not  to  be  considered 
as  beyond  alteration,  as  illustration  16  will  show. 

Surety  companies  and  other  concerns  are  now  issuing 
bonds  insuring  makers  of  checks  against  forgery  and 


rH(  )TKCTI()N  OF  BANK  CHECKS 


59 


60  THE  BUSINESS  MAN  AND  HIS  BANK 

alteration.  They  insure  against  loss  but  do  not  prevent 
tampering  with  checks. 

A  firm  in  Chicago  has  recently  put  out  a  form  of  check 
which  has  various  amounts  printed  in  the  margin. 
By  tearing  off  the  paper  to  the  figures  nearest  the  amount 
of  the  check,  the  highest  amount  to  be  paid  is  indicated 
in  the  same  manner  as  used  by  the  Government  on 
money  orders  (see  illustration,  page  59).  This,  in  con- 
nection with  safety  paper,  would  seem  to  be  the  last 
word  in  check  protection. 

In  a  pamphlet  issued  by  the  Geo.  W.  Todd  Company 
of  Rochester,  N.Y.,  makers  of  check  protecting  devices, 
WiUiam  J.  Burns  the  famous  detective  says,  in  speaking 
of  check  raising: 

As  between  merely  forged  documents  (manufactured  "out  of  whole 
cloth")  and  the  genuine  document  on  which  the  amount  is  "'raised" 
or  altered,  the  danger  to  those  signing  and  handling  the  altered  in- 
strument is  infinitely  greater.  In  fact,  from  some  of  the  remarkable 
examples  of  "raised"  checks,  drafts,  stock  certificates  and  promissory 
notes  that  I  have  examined  lately,  it  would  indicate  that  the  "raised" 
amount  is  more  dangerous  to  the  financial  peace  of  organized  society 
than  the  nitro-glycerine  can  of  the  professional  dynamiter. 

"  The  methods  of  the  forger,  too,  in  obtaining  checks  signed  by 
responsible  men  and  business  houses  are  most  interesting,  as  showing 
how  difficult  it  is  to  guard  against  the  "check  raiser."  For  instance, 
they  have  developed  a  trick  lately  of  sending  a  small  but  perfectly 
good  check  of  their  own  to  some  business  house.  Then,  after  there 
has  been  plenty  of  time  for  it  to  be  duly  deposited,  there  follows  a 
polite  letter,  notifying  the  intended  victim  that  a  mistake  was  made 
in  sending  this  check,  that  it  should  have  been  addressed  to  another 
house  of  similar  name  in  another  city,  and  will  they  kindly  return 
the  money? 

"In  complying  with  this  perfectly  proper  (?)  request,  the  average 
business  concern  naturally  responds  by  sending  its  own  check  for  the 
amount  to  the  writer  of  the  letter,  explaining  that  this  check  had 
been  deposited  before  his  letter  arrived.  And  this  check  by  the  way, 
is  invariably  for  a  very  small  amount,  as  the  "check  raiser"  does  not 
care  to  invest  more  actual  money  than  is  really  necessary. 


PROTECTION  OF  BANK  CHECKS 


61 


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64 


THE  BUSINESS  MAN  AND  HIS  BANK 


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PROTECTION  OF  BANK  CHECIvS  65 

"You  will  see  that  a  So  check  signed  by  a  good  concern  is  just  as 
good  for  his  purpose  as  a  $5,000  one,  because  he  can  twist  the  "five" 
into  "five  thousand"  with  very  little  trouble  and  only  a  drop  or  two 
of  acid  and  another  drop  or  two  of  ink — provided  the  concern  has  not 
taken  the  thoughtful  precaution  to  protect  its  check  before  sending 
it  to  the  polite  stranger.  (And,  by  the  way,  it  is  amazing  how  many 
otherwise  conservative  concerns  there  are  in  this  country  that  will 
safeguard  everything  connected  with  their  business  except  their  own 
signatures — which  represent  all  the  rest  of  their  property  put  together! 

On  "receiving  the  little  genuine  check,  the  forger  then  performs  his 
interesting  operation  by  the  use  of  bleaching  acids,  removing  the  design 
of  the  paper  if  necessary,  and  restoring  it  after  the  amount  has  been 
altered  to  suit  his  needs.  He  fills  up  perforations,  or  punchings,  if 
necessary,  and  the  inks  of  the  best  manufacturers  are  scarcely  proof 
against  his  skill,  since  he  can  remove  even  printing  and  lithographic 
ink  when  necessary.  Moreover,  in  many  cases,  it  is  not  required  to 
remove  anything  at  all,  as  many  small  amounts  can  be  changed  by 
"penning" — simply  adding  a  few  pen  strokes  to  the  original  amount 
— and  there  you  are! 

"When  the  alteration  is  finally  discovered  by  the  concern  that  is- 
sued the  check,  the  question  is,  "How  are  you  going  to  prove  the 
alteration?"  Or,  "Which  one  of  the  several  endorsers  on  this  check 
was  the  guilty  party?"  It  is  a  very  difficult  situation,  and  one  that 
can  rarely  be  cleared  up  to  the  satisfaction  of  the  bank,  its  deposi- 
tor, the  correspondent  banks,  and  others  concerned. 

"I  might  mention  that  we  have  recently  investigated  cases  where 
they  managed  to  alter  checks  in  such  a  way  that  they  actually  left 
no  loop-hole  through  which  to  prove  the  fraud  and  indict  them  for 
forgery — and  they  accomplish  it  in  somewhat  the  following  manner: 

"Orders  had  been  given  to  a  bank  to  stop  payment  on  a  certain 
check  for  a  certain  amount,  payable  to  a  wholesale  house,  dated  on 
such  a  day,  number  so-and-so.  It  was  believed  that  the  check  had 
been  stolen.  Twice  within  two  months  the  bank  was  reminded  to 
be  on  the  lookout  for  this  check — and  then,  in  the  last  hour  of  a 
busy  Saturday  morning  during  the  third  month,  the  check  slipped 
through.     But  the  bank  was  not  to  blame. 

"The  forger  had  first  "raised"  the  amount  by  several  hundred 
dollars.  Then  he  changed  the  number  of  the  check,  and  brought  the 
date  right  up  to  that  very  day,  as  though  the  check  had  been  given 
to  him  only  a  few  minutes  previous  to  his  appearance  at  the  bank — 
although  the  check  was  really  nearly  four  months  old.     Lastly,  he 

5 


66 


THE  BUSINESS  MAN  AND  HIS  BANK 


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PROTECTION  OF  BANK  CHECKS 


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68  THE  BUSINESS  MAN  AND  HIS  BANK 

had  removed  the  name  of  the  rightful  payee  (the  wholesale  house) 
and  written  his  own  name  instead,  so  that  he  did  not  have  to  forge 
an  indorsement.  He  was  properly  identified,  indorsed  the  check  with 
his  own  name,  took  the  money — and  disappeared.  There  was  ab- 
solutely nothing  of  the  original  writing  left  but  the  genuine  signature. 
How  could  you  blame  the  bank? 

"  Moreover,  the  work  was  so  perfectly  executed  that  it  is  doubtful 
if  it  would  have  been  possible  to  prove  the  alteration  even  if  the 
swindlers  had  been  caught.  They  were  not,  for  the  fraud  was  not 
discovered  until  nearly  two  weeks  later,  when  the  signer  of  the  check 
looked  over  his  bank  account  and  found  it  short. 

"I  have  told  you  all  of  this  in  detail,  so  you  will  understand  that  I 
have  a  reason  for  the  statement  that  it  behooves  every  bank  to  see  to 
it— and  every  business  house  as  well— that  all  precautions  are  taken 
in  making  out  their  checks,  regardless  of  the  responsibility  or  honesty 
of  the  party  to  whom  thej^  are  issued. 

"In  New  York  and  other  cities  we  are  constantly  finding  proof  of 
the  cunning  employed  by  these  crooks  to  gain  their  ends,  and  1  will 
give  you  a  few  illustrations  to  show  how  difficult  it  is  to  safeguard 
yourself  against  their  methods. 

"We  mil  say  that  a  band  of  swindlers  desires  to  know  what  amount 
it  will  be  safe  to  use  in  tampering  with  the  check  of  a  certain  con- 
cern, what  number  to  use,  etc. 

"About  five  o'clock  in  the  afternoon  a  young  man  calls  at  the  office 
of  the  concern  and  states  that  he  understands  his  emploj^ers  have  had 
complaints  from  the  head  of  this  firm  about  the  paper  furnished  for 
its  checks  fading  out  or  turning  color.  The  head  of  the  business  has 
gone  home  and  the  book-keeper  suggests  to  this  young  man  that  he 
call  the  following  day. 

"The  young  man  then  asks  if  he  may  examine  some  of  the  can- 
celled checks  to  see  what  reason  there  may  be  for  the  complaint.  He 
asks  to  see  some  of  the  old  checks  and  also  some  of  the  recent  ones, 
for  purposes  of  comparison,  which  seems  reasonable,  and  some  of 
the  checks  are  produced  from  the  vault. 

"By  a  little  sleight-of-hand,  which  is  part  of  his  business, the  rascal 
manages  to  abstract  one  of  the  recent  checks,  and  thus  goes  away 
armed  with  all  the  working  material  and  information  that  he  needs. 
He  may  utilize  the  old  cancelled  check  by  filling  in  the  "Paid  Stamp" 
perforations  and  changing  the  amounts,  dates,  etc.  At  any  rate  he 
has  possession  of  a  genuine  check,  which  is  a  mighty  dangerous  in- 
strument in  such  hands. 


PROTECTION  OF  BANK  CHECKS  69 

"In  one  case  the  swindlers  desired  to  use  the  sample  check  merely 
as  a  "model"  from  which  to  prepare  a  big  forged  check,  and  they 
managed  without  much  trouble  to  get  possession  of  some  blank  check 
forms  of  this  concern,  on  which  they  did  a  very  neat  piece  of  work 
and  secured  about  $10,000  from  one  of  the  biggest  banks  in  New  York. 

"The  checks  being  printed  specially  with  the  name  of  the  concern 
in  peculiar  type,  and  on  a  special  tinted  paper  manufactured  only  for 
this  particular  bank,  in  connection  with  other  circumstances  surround- 
ing the  case,  the  deduction  was  that  the  blank  check  must  have 
come  from  the  printer  who  made  the  checks  for  this  bank. 

"I  called  upon  the  printer,  and  he  told  me  that  it  was  absolutely 
impossible  for  any  person  to  secure  one  of  these  checks.  I  asked  him 
what  precaution  he  took  for  safeguarding  the  checks.  He  went  to  a 
drawer  and  brought  out  a  large  book,  containing  samples  of  the  various 
checks  he  had  printed.  I  asked  "Wouldn't  it  be  possible  to  get  some 
of  these?"  He  answered:  "Oh,  no!"  I  then  told  him  my  purpose, 
that  I  was  there  as  a  representative  of  the  American  liankers'  Asso- 
ciation, to  determine  how  the  forger  had  secured  those  checks,  and 
he  assured  me  it  was  absolutely  impossible,  that  the  checks  in  ques- 
tion must  have  been  stolen  from  the  firm  or  counterfeited. 

"Then  I  asked:  "Would  it  be  possible  to  get  them  from  the  press- 
man?" "No,  because  we  count  out  the  sheets  given  to  him,  and  he 
accounts  for  them."  So  I  asked:  "Would  it  be  possible  to  get 
them  from  the  bookbinder?"  "No,"  he  replied  again,  because  the 
same  method  is  followed  with  the  bookbinder." 

"I  then  pulled  from  my  pocket  ten  of  these  checks,  and  said: 
"Where  do  you  suppose  I  get  these?" 

He  looked  at  them  in  astonishment,  and  said:  "Why,  I  don't 
know." 

I  said,  "Why,  I  just  pulled  them  off  your  wall,  among  six  or  seven 
hundred  other  samples  hanging  there.  You  did  not  see  me  get 
them?" 

"Well,"  he  said,  "that  couldn't  happen  but  once." 

"So  T  left  him  and  went  to  the  press  room,  and  there  I  succeeded  in 
finding  a  number  of  samples  of  checks,  but  not  of  this  particular  sort. 
I  next  called  at  the  bookbinder's,  and  there  obtained  twenty  of  the 
same  identical  checks,  thrown  to  one  side  by  the  binder.  I  carried 
those  back  to  the  printer,  and  I  said  to  him:  "What  is  the  use  of  a 
bank  taking  any  precaution  to  pay  for  security  in  printing  of  this 
character,  when  any  person  who  wants  to  do  so  can  get  the  checks  at 
will?     And  moreover,"  I  pursued,  "the  very  assumed  security  of  this 


70 


THE  BUSINESS  MAN  AND  HIS  BANK 


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PROTECTION  OF  BANK  CHECKS  73 

work  you  are  doing  makes  it  all  the  more  dangerous  to  your  customers; 
because  these  checks  are  supposed  to  be  safeguarded,  and  the  banks 
generally  so  regard  them,  and  when  they  get  in  circulation,  as  in  this 
case,  they  are  calculated  to  fool  not  only  the  banker,  but  the  mer- 
chant, anywhere,  because  it  is  supposed  to  be  impossible  for  outsiders 
to  get  possession  of  such  checks." 

"These  are  some  of  the  questions,  gentlemen,  that  the  bankers 
must  take  up  for  the  protection  of  the  world  of  banking  and  business. 
They  must  see  to  it,  first  of  all,  that  the  printer  who  prints  their 
checks  takes  greater  precautions  toward  preserving  those  checks  from 
crooks.  Then,  in  the  next  place,  they  must  use  their  good  offices 
with  depositors  to  see  that  they  are  careful  as  to  the  manner  in  which 
they  issue  their  checks. 

"I  do  not  mean  that  depositors  can  avoid  giving  checks  to  strangers 
— because  the  strangers  will  find  a  thousand  ways  of  getting  them, 
anyway — but  they  can  write  them  in  such  a  manner  that  they  will 
not  be  a  positive  invitation  to  crookedness,  as  so  many  checks  are  at 
the  present  day. 

"There  is  one  other  matter  that  I  do  not  propose  to  talk  about 
publicly,  because  it  is  too  dangerous;  but  I  want  to  notify  bankers 
who  have  safety  deposit  vaults  that  if  they  will  see  me  privately  I 
will  be  glad  to  give  them  some  valuable  hints  as  a  result  of  a  very  im- 
portant investigation  I  have  just  finished,  involving  the  theft  of  over 
a  million  dollars. 

"In  the  case  of  this  particular  safety-deposit  fraud  we  fortunately 
succeeded  in  getting  the  money  back ;  but  it  is  not  always  you  can  do 
that,  because  let  me  admit  to  you  the  detective  does  not  possess  any 
uncanny  or  supernatural  method  for  solving  his  problems.  You 
have  only  to  apply  the  same  common  sense  and  judgment  in  this 
work  that  you  do  in  every  day  affairs,  and  thus  you  get  results. 

"Some  of  the  most  effective  work  we  are  able  to  do  is  in  the  line  of 
warning  the  banks  and  business  public  against  certain  forms  of  fraud 
and  how  to  guard  against  them,  as  I  have  tried  to  do  in  this  little  talk 
— and  if  there  is  any  field  of  endeavor  in  which  "an  ounce  of  preven- 
tion" is  worth  while,  I  feel  it  is  in  this  work  of  protecting  the  banks 
against  up-to-date  forms  of  fraud." 


CHAPTER  IX 

THE  PAYING  TELLER 

As  the  recei\dng  teller  was  likened  to  the  hopper  into 
which  is  poured  the  receipts  of  the  bank,  so  the  paying 
teller  may  be  Ukened  to  the  other  end  of  the  funnel. 
He  gives  out  what  the  receiving  teller  takes  in.  He  is 
the  dispenser  of  the  bank's  funds  and  is  charged  with  the 
following  duties:  first,  cashing  checks,  both  those  drawn 
on  his  own  bank  and  those  drawn  on  other  banks  and 
offered  him  for  cashing;  second,  making  up  pay  rolls, 
which  is  essentially  cashing  checks  in  a  certain  pre- 
scribed way;  third,  certifying  checks;  fourth,  settling 
the  clearing  house  balances,  which  also  is  nothing  more 
than  paying  checks  drawn  on  his  own  bank  in  bulk. 

It  matters  not  whether  the  check  comes  to  him  through 
the  window,  through  the  mails,  or  through  the  clearing 
house,  it  is  his  duty  to  examine  it  and  decide  whether 
or  not  to  pay  it.  In  over-the-counter  transactions 
this  must  be  done  in  a  few  moments,  but  in  paying  mail 
items  longer  time  is  allowed,  although  in  clearing  house 
settlements  the  time  allowance  is  about  two  hours 
only.  During  this  time  thousands  of  checks  in  large 
banks  must  be  examined,  and  parts  of  the  work  must 
therefore  be  delegated  to  others. 

In  the  last  analysis  all  checks  are  presented  to  the 
paying  teller,  for  although  he  does  not  actually  pay  those 
coming  through  the  mail,  he  authorizes  their  payment 
by  drawing  the  bank's  draft  on  its  correspondent  for 
the  amount  of  checks  so  received.  The  clearing  house 
checks  are  actually  paid  by  him,  as  will  be  seen  under 

74 


THE  PAYING  TELLER  75 

the  caption  ''clearing  houses,"  and  he  is  therefore  the 
one  charged  with  passing  upon  all  checks  drawn  on 
his  bank  and  determining  whether  or  not  they  are  in 
due  form  and  a  proper  charge  to  the  depositor's  ac- 
count according  to  law  and  the  practice  governing  such 
payments. 

We  will  now  take  up  the  payment  of  a  check,  first 
directly  tlirough  the  paying  teller's  window,  then  the 
collection  of  a  check  through  the  mails  and  lastly  the 
clearing  house  exchanges. 

The  Bank's  Obligation  to  Pay  Checks. 

The  obligation  of  a  bank  is  absolute  in  its  agreement 
to  pay  the  checks  of  its  depositors,  properly  drawn  and 
presented,  but  the  depositor  must  have  on  deposit 
sufficient  funds  to  meet  the  obligation.  Having  funds 
on  deposit  does  not  mean  that  he  shall  have  credit  for 
a  certain  amount,  for  this  may  be  merely  a  credit  for 
checks  which  have  not*  been  collected.  Thus,  if  there 
was  deposited  in  a  bank  in  New  York  ten  checks  on 
various  cities  in  New  England  aggregating  $10,000.00, 
it  would  be  at  least  three  days  before  the  bank  could 
collect  these  checks.  If  a  check  were  presented  for 
payment,  and  the  only  funds  on  deposit  were  these  checks 
in  the  course  of  collection,  the  bank  would  be  paying 
out  its  own  funds,  in  reality  loaning  the  amount  until 
the  checks  were  paid.  But,  assuming  the  credit  in 
the  bank  to  represent  checks  actually  paid  and  cash 
deposits,  the  bank  is  in  duty  bound  to  pay  them  as 
presented,  provided  the  following  features  of  the  check 
are  in  proper  form: 

1.  The  date.  Checks  may  be  dated  ahead,  but  they  cannot  be 
paid  until  their  date  arrives.  If  the  date  has  long  passed,  they  be- 
come what  is  known  as  "stale  checks,"  and  the  bank  is  not  author- 
ized to  honor  such  without  due  inquiry. 


76  THE  BUSINESS  MAN  AND  HIS  BANK 

2.  The  words  and  figures  must  agree,  and  if  tiiere  is  any  discrep- 
ancy, the  xvords  govern,  for  it  is  provided  in  the  Negotiable  Instruments 
Law,  "Wherever  any  discrepancy  exists  between  the  two,  the  amount 
written  out  shall  control." 

3.  The  signature  must  be  in  proper  form. 

4.  The  payee  must  be  identified,  and  the  check  properly  endorsed. 

5.  No  stop  payment  must  have  been  lodged  against  the  check. 

6.  If  presented  at  the  bank  drawn  on,  the  account  must  be  good 
for  the  amount. 

Important  features  of  Bank  Checks. 

In  scrutinizing  checks  for  payment  the  paying  teller 
examines  the  above  points;  and  in  so  far  as  possible 
the  business  man  should  follow  the  same  procedure  in 
accepting  checks  and  examine: 

1.  The  date,  to  see  that  it  is  not  dated  ahead;  nor 
so  old  as  to  come  under  the  designation  ''stale."  A 
check  dated  three  months  back  would  come  under  this 
rule,  although  the  courts  have  never  decided  just  how 
old  a  check  must  be  to  be  considered  stale. 

2.  The  words  and  figures  should  agree.  If  they  do 
not,  the  words  control. 

3.  The  indorsement  of  the  payee  (the  one  to  whose 
order  first  drawn)  must  be  thereon;  and  if  it  has  passed 
through  several  hands,  the  chain  of  indorsements  must 
be  complete.  It  should  be  first  indorsed  exactly  as 
made  out. 

4.  If  the  maker  is  not  known,  the  one  negotiating 
the  check  should  be  so  well  known  to  the  one  accepting 
the  check  that  in  the  event  the  check  is  returned,  reim- 
bursement may  be  had  from  the  indorser.  Here  is  where 
the  risk  lies  in  taking  unknown  checks.  If  your  indorser 
is  not  responsible  beyond  a  doubt,  caution  is  in  order. 

5.  There  must  be  no  stop  order  against  the  check. 
This  fact  cannot  be  known  until  it  is  finally  presented 
at  the  bank  drawn  on. 

6.  The  account  must  be  good  for  the  amount.     This 


THE  PAYING  TELLER  77 

also  cannot  be  known  until  the  check  is  presented  at 
the  paying  bank.  Therefore  do  not  cash  checks  for  those 
you  do  not  know. 

The  Business  Man  and  the  Paying  Teller. 

The  paying  teller  is  generally  conceded  to  have  a 
more  responsible  position  than  the  receiving  teller  in 
that  he  cannot  verify  his  work  once  it  is  done.  When 
the  funds  pass  through  his  window  they  are  beyond  his 
control  and  only  the  honesty  of  the  customer  can  save 
him  from  loss  in  case  the  error  is  against  the  bank. 

A  few  rules  in  connection  with  the  paying  teller's 
work  will  be  helpful  both  to  him  and  to  the  customer: 

1.  In  presenting  a  check  for  cashing  see  that  it  is  indorsed 
properly. 

2.  Name  the  denominations  desired. 

3.  In  requesting  pay  rolls,  use  the  bank's  blanks  for  classifying 
the  kinds  of  money  desired. 

4.  In  signing  checks  adhere  closely  to  the  signature  furnished  when 
the  account  was  opened. 

5.  Make  your  figures  plainly. 

6.  Do  not  use  "freak"  checks — that  is,  a  form  with  much  personal 
advertising  matter  thereon.  Do  not  cheapen  your  check  b}^  too  much 
ornamentation.     The  less  printing  the  more  dignity  to  the  check. 

7.  Have  the  figures  where  the  bank  prefers  they  should  be,  pre- 
ferably following  the  filling  so  that  all  the  checks  will  have  the  figures 
in  the  same  place.  This  helps  greatly  in  handling  the  checks  in  the 
various  departments. 

8.  Do  not  use  oversize  or  undersize  checks.  They  are  difficult  to 
handle  in  connection  with  others. 

9.  While  it  is  not  a  legal  requirement,  some  form  of  protection 
should  be  used  to  prevent  the  check  being  altered  after  leaving  the 
hands  of  the  maker.  There  are  many  devices  for  this  purpose,  and  no 
one  can  claim  to  be  the  perfect  method.  There  are  several  machines 
that  write  the  words  into  the  fibre  of  the  paper  and  inject  in- 
delible ink  into  the  perforations.  These  are  not  expensive  and 
should  be  used  by  every  business  man. 

10.  If  you  have  more  than  one  account,  get  a  rubber  stamp  and 
use  it  to  designate  the  account  other  than  your  regular  one. 


78  THE  BUSINESS  MAN  AND  HIS  BANK 

11.  IJse  a  rubber  stamp  for  indorsing  if  you  handle  manj'-  checks. 
This  not  only  saves  time  in  your  office  but  is  much  better  than  a 
penned  indorsement. 

Certification. 

The  certification  of  a  check  is  equivalent  to  paying  it ; 
or,  to  be  technically  correct,  substituting  the  promise 
of  the  bank  for  the  order  on  the  bank.  Certification  is 
accomplished  by  writing  the  word  "accepted"  or 
"certified"  across  the  face  of  the  check  with  the  signa- 
ture of  the  teller  or  other  officer  underneath.  As  a 
rule  this  act  is  performed  by  the  pajdng  teller,  inasmuch 
as  it  falls  within  the  category  of  paying  checks,  and 
therefore  properly  belongs  to  his  duties. 

When  a  check  is  presented  at  the  teller's  window  it  is 
presented  for  payment  only;  but  the  holder  may  waive 
payment,  and  accept  in  its  place  the  promise  of  the 
bank.  The  legal  effect  of  certification  is  to  discharge 
the  maker  of  the  check  absolutely  and  substitute  the 
promise  of  the  bank  instead.  The  practical  effect  is  to 
charge  the  account  of  the  maker  at  once  with  the  amount 
and  credit  "certified  checks."  The  maker  is  then  out 
of  the  transaction  altogether,  and  the  bank  assumes  the 
obhgation.  When  the  check  comes  back  for  final 
payment,  it  is  charged — not  to  the  maker's  account, 
for  this  has  already  been  done,  but  to  "certified  check 
account,"  and  the  voucher  returned  to  the  maker  for 
his  records. 

There  is  a  distinction,  however,  that  arises  when  the 
maker  of  the  check  presents  it  for  certification.  When 
the  holder  presents  the  check,  the  maker  is  released; 
but  when  the  maker  obtains  the  certification,  he  is  still 
Mable  in  case  the  bank  fails  before  the  check  is  paid. 
The  reason  for  this  is  that  the  holder  had  the  option 
of  taking  cash  or  the  bank's  promise;  and  having  chosen 
the  latter,  he  cannot  have  redress  upon  the  maker;  but 


THE  PAYING  TELLER  79 

where  the  maker  has  the  check  certified  before  putting 
it  into  circulation,  the  holder  does  not  have  this  choice 
and  it  follows  logically  that  the  maker  should  still  be 
held  in  the  event  that  the  check  is  not  paid  when  finally 
presented. 

Certified  checks  are  used  daily  in  large  numbers  in 
transactions  affecting  real  estate  transfers,  pa^inent  of 
taxes,  Ucenses,  Wall  Street  dealings  and  other  such 
transactions,  in  the  settlement  of  which  they  are  re- 
garded as  equivalent  to  money. 

Checks  Paid  in  the  Order  of  Their  Presentation. 

The  paying  teller  will  pay  checks  in  the  order  of  their 
presentation  and  the  rule  of  ''first  come,  first  served" 
applies.  Checks  are  presented  tlii-ough  the  mails, 
through  the  other  banks  by  messenger  and  over  the 
counter,  and  it  often  becomes  a  fine  point  to  determine 
which  checks  take  precedence.  If  a  batch  comes  in 
through  the  mail,  they  will  be  paid  so  far  as  the  funds 
warrant  and  the  rest  will  be  returned.  If  several 
customers  were  standing  in  line  before  the  paying 
teller's  window,  each  holding  a  check  of  the  same  party 
in  different  amounts,  they  would  be  paid  so  far  as  the 
funds  were  sufficient.  If  C's  check  could  be  paid  be- 
cause it  was  smaller  than  B's,  C  would  take  precedence 
over  B.  B  could  not  be  paid  in  part  even  though  he 
might  be  willing  to  accept  less  than  the  full  amount. 

There  is  an  old  trick,  which  may  be  stated  best  by 
illustration.  Suppose  A  holds  a  check  for  $100  drawn 
by  B.  Upon  presenting  it  is  found  to  be  short  $10. 
A  might  be  willing  to  accept  the  $90,  but  the  bank  can- 
not pay  in  part.  It  must  pay  in  full  or  not  at  all. 
May  A  deposit  $10  and  thus  make  the  account  good? 
The  opinions  are  to  the  contrary.  He  could  only  do 
so  by  subterfuge  and  without  the  knowledge  of   the 


80  THE  BUSINESS  MAN  AND  HIS  BANK 

bank.  The  legal  reason  is  that  B  may  have  inten- 
tionally kept  his  account  short  to  prevent  the  payment 
of  the  check,  and  the  order  is  to  pay  $100  and  not 


Legal  Tender. 

We  frequently  hear  the  term  ''legal  tender"  used  in 
connection  with  business  transactions.  Let  us  see 
what  legal  tender  is  and  what  is  the  practical  signi- 
ficance of  the  term. 

The  law  has  stipulated  what  kind  of  money  shall  be 
legal  tender,  and  the  purpose  is  to  afford  a  medium  of 
payment  which  the  creditor  cannot  refuse.  There  have 
been  times  in  the  history  of  this  country  when  the 
circulating  currency  was  depreciated  below  par  and  its 
value  uncertain  and  fluctuating.  Particularly  was  this 
true  of  the  old  state  bank  notes.  This  condition  ob- 
tains in  Russia  today,  where  there  are  several  different 
issues  of  currency  in  use,  some  put  out  by  one  faction 
of  the  government  and  some  by  another.  Most  of 
this  is  worth  less  than  the  face  amount,  and  the  cred- 
itor taking  such  money  would  of  course  suffer  loss,  if 
taken  below  the  market  value.  In  order  to  provide 
a  form  of  payment  that  must  be  acceptable,  legal  tender 
has  come  into  being. 

The  use  of  legal  tender  and  its  purpose  will  be  seen 
in  the  following  instances:  A  certain  lawyer  held  a 
mortgage  which  was  not  yet  due  on  a  piece  of  property 
in  Brooklyn.  He  was  anxious  to  get  title  to  the  property 
for  the  purpose  of  adding  to  his  corner  for  improvement 
purposes.  The  owner  knowing  his  anxiety  named  an 
excessive  price,  and  the  two  could  not  get  together. 
The  lawyer  thereupon  bought  a  mortgage  that  was 
already  on  the  property  which  had  five  years  to  run. 
If  he  could  get  the  owner  in  default,  he  could  foreclose, 
and  he  used  his  best   wits   to   accomplish   this.     The 


THE  PAYING  TELLER  81 

owner  was  short  of  funds  and  the  last  day  for  payment 
of  interest  arrived.  The  owner  tendered  his  check, 
which  the  lawyer  refused  to  accept  unless  certified. 
The  bank  was  closed,  and  certification  could  not  be 
obtained.  Thereupon,  the  owner,  on  the  advice  of 
counsel,  procured  the  amount  in  greenbacks,  silver 
dollars  and  small  change  and  made  his  tender,  which 
the  owner  was  obliged  to  accept  and  give  him  receipt. 
He  had  made  legal  tender. 

In  another  case  a  party  entered  into  contract  to  sell 
a  house  for  a  given  amount  and  accepted  $100  down,  the 
balance  to  be  paid  on  a  stated  day.  Before  the  day 
arrived,  the  owner  was  offered  a  larger  sum  for  the 
property  and  naturally  regretted  his  contract.  On 
the  appointed  day  the  buyer,  having  heard  of  the 
matter,  tendered  the  amount  in  legal  tender,  which,  of 
course,  the  seller  was  compelled  to  accept.  Legally, 
he  could  have  refused  any  other  form  of  money  or  check. 

There  are  not  many  cases  that  require  legal  tender, 
although  instances  do  occur  with  some  frequency. 
It  is  needful,  therefore  to  know  what  is  and  what  is  not 
legal  tender,  for  otherwise  the  legal  effect  may  be  en- 
tirely lacking. 

By  the  laws  of  the  United  States  the  following  are 
legal  tender: 

Gold  certificates  in  any  amount. 

Gold  coin  in  any  amount. 

Silver  dollars  except  where  stipulated  otherwise  in 
the  contract. 

Treasury  notes  of  1890  unless  otherwise  stipulated 
in  the  contract. 

Greenbacks  in  any  amount. 

Silver  quarters,  halves  and  dimes  up  to  $10  in  one 
payment.     Nickels  and  cents  up  to  25  cents. 

The  following  are  not  legal  tender: 


82  THE  BUSINESS  MAN  AND  HIS  BANK 

Silver  certificates. 
National  Bank  notes. 
Federal  Reserve  notes. 
Federal  Reserve  bank  notes. 
Checks  certified  or  otherwise. 

Uncollected  Funds. 

Business  men  frequently  receive  checks  back  from 
their  bank  unpaid  with  the  notation  ''Drawn  against 
uncollected  funds. "  Let  us  see  what  this  phrase  means 
by  an  example.  You  are  doing  business  in  New  York 
and  receive  a  check  on  a  Denver  bank.  You  deposit 
it  with  your  bank.  It  will  take  at  least  8  days  for  the 
bank  to  send  the  check  to  Denver  and  receive  in  return 
a  draft  on  New  York  which  they  can  count  as  their 
reserve.  Suppose  you  draw  a  check  against  this  de- 
posit the  next  day  and  the  bank  pays  it,  what  hap- 
pens? The  bank  has  loaned  you  the  amount  for  seven 
days  without  interest,  for  it  will  be  that  long  before  the 
check  is  paid  to  them.  The  check  may  come  back  and 
the  bank  would  have  to  look  to  you  for  reimbursement. 
Other  things  might  happen  as  noted  before  to  prevent 
the  payment  of  the  check.  Therefore  banks  do  not, 
generally,  pay  against  checks  that  have  not  been  paid  to 
them,  and  business  men  should  not  expect  them  to  do  so. 
How  long  it  will  take  the  bank  to  reduce  the  checks 
deposited  to  available  funds  depends  upon  the  time 
consumed  in  making  the  collection.  In  some  cases  it  is 
one  day  and  in  others  eight  days. 

Stale  Checks. 

The  question  as  to  how  old  a  check  must  be  to  become 
stale  has  never  been  authoritatively  stated.  It  is 
well  settled  that  when  a  check  is  presented  a  long  time 
after  its  date,  the  bank  is  justified  in  withholding  pay- 
ment until  it  can  make  inquiry,  and  such  a  delay  is  not 


THE  PAYING  TELLER  83 

a  refusal;  but  whether  or  not  the  l)auk  is  under  abso- 
lute duty  to  make  inquiry  or  notify  the  drawer,  is  in 
doubt. 

Therefore,  checks  should  not  be  held  over  for  any 
reason,  but  should  be  promptly  presented  to  the  bank 
drawn  on  for  payment. 

Memoranda  on  Checks. 

As  a  general  rule,  a  bank  on  which  a  check  is  drawn  is 
not  required  to  take  notice  of  any  notations  on  the 
margin  or  in  the  body  of  the  check,  and  when  such  is  the 
case,  the  memo  or  figures  is  not  a  notice  that  the  check 
is  to  be  paid  from  a  particular  fund,  or  for  a  particular 
purpose.  Likewise,  a  deposit  ticket  that  is  intended  to 
go  to  a  particular  fund  should  be  kept  separate  from 
other  deposits  of  the  same  party,  and  must  be  so  marked 
that  the  bank  may  not  be  misled  in  making  the  credit. 
Thus,  if  the  depositor  runs  two  accounts,  one  personal, 
and  one  as  ''agent,"  or  "special,"  or  what  not,  he  cannot 
complain  if  he  fails  to  mark  his  deposit  ticket  correctly 
causing  the  bank  to  make  an  improper  credit. 

Checks  for  Small  Sums. 

We  have  seen  that  a  depositor  in  a  bank  has  the  right 
to  draw  as  many  checks  as  he  may  like  and  in  whatever 
sums,  and  the  bank  is  bound  to  honor  them  as  long  as 
the  balance  is  sufficient.  There  is  a  natural  hesitancy 
in  drawing  checks  for  sums  under  one  dollar,  as  such 
seem  to  be  too  small  to  bother  with;  but  it  must  be 
remembered  that  a  check  is  a  check,  and  the  same  work 
that  follows  a  check  for  ten  thousand  dollars  attends  a 
check  for  ten  cents.  The  bank  is  just  as  willing  to 
handle  one  as  the  other.  The  only  point  to  observe  is 
to  draw  checks  under  one  dollar  so  plainly  that  confusion 
is  avoided.     Write  the  word  "cents"  after  the  amount 


84  THE  BUSINESS  MAN  AND  HIS  BANK 

in  the  filling  and  indicate  the  amount  in  the  space  for 
the  figures  thus  ''.^Hoo  only." 

Stop  Payment. 

The  depositor  has  another  right  that  follows  the  right 
of  drawing  checks  and  that  is  the  right  to  stop  payment, 
or  to  cancel  his  order  to  pay.  The  rules  in  this  regard 
are  simple.  First  the  stop  order  must  be  in  wTiting 
and  it  must  reach  the  bank  before  the  check  is  presented. 
An  oral  stop  notice  is  not  binding,  neither  is  a  telephone 
request.  A  telegraphic  stop  would  be  binding.  Banks 
as  a  rule  endeavor  to  comply  with  an  oral  request  to  stop 
payment,  but  this  would  not  be  effective  if  the  check  were 
presented  before  the  WTitten  notice  came  to  hand,  and  as 
a  strict  matter  of  law  the  bank  would  be  bound  to  pay. 
In  filing  a  stop  payment  order  give  the  date  of  the  check, 
the  number,  amount  and  to  whose  order  drawn. 

These  stop  notices  are  the  bane  of  the  banking  world 
and  are  not  to  be  encouraged;  therefore  do  not  cancel  a 
check  unless  it  is  necessary.  The  risk  to  the  bank  is 
considerable  and  in  the  event  that  the  check  gets  through 
loss  will  attend  if  the  customer  stands  on  his  legal  rights. 
An  appropos  story  will  illustrate  the  risk.  A  certain 
liquor  dealer  ordered  a  barrel  of  whiskey  from  his  whole- 
saler and  drew  his  check  for  the  amount.  In  acknow- 
ledging the  order,  the  firm  listed  the  order  as  for  two 
barrels,  which  disturbed  the  buyer  and  he  cancelled 
the  order  and  stopped  payment  on  the  check.  In  the 
rush  of  the  day's  work  the  check  got  through  and  was 
paid.  The  maker  claimed  his  rights  and  the  bank  had 
no  other  course  open  but  to  refund,  which  they  did. 
They  thereupon  paid  the  government  tax  on  the  whiskey, 
had  it  shipped  to  their  order  and  held  it  as  a  "liquid 
asset"  until  another  dealer  came  along  and  took  it  off 
their  hands.  Not  all  miscarriages  of  stop  payments 
work  out  so  well. 


THE  PAYING  TELLER  85 

Reconciling  your  Bank  Account. 

An  account  with  a  bank  should  be  reconciled  at  fre- 
quent intervals,  as  a  safeguard  both  to  the  bank  and  to 
the  depositor.  If  any  errors  exist  they  may  speedily 
be  corrected,  and  if  fraud  and  forgery  have  been  perpe- 
trated through  the  account,  the  bank  may  be  on  guard 
against  a  continuance  of  the  practices.  In  some  states 
the  statute  provides  that  if  the  depositor  does  not  report 
any  claims  for  forged  or  altered  checks  within  a  stated 
time,  he  loses  his  redi-ess  against  the  bank.*  Moreover 
the  business  man  wants  to  know  that  his  books  are  in 
balance  with  those  of  the  bank.  This  work  should  not 
be  done  by  the  one  who  draws  the  checks  or  handles  the 
funds,  for  numerous  cases  are  on  record  where  the  one 
who  manipulated  the  account  reconciled  the  balance, 
and  thus  covered  up  his  abstractions.  WTiere  this 
obtains,  the  courts  would  no  doubt  hold  the  depositor 
negligent  in  allowing  the  one  guilty  of  the  fraud  to 
check  the  bank  statements. 

The  reconcilements  are  made  in  two  ways:  First  by 
having  the  bank  book  balanced.  This  means  that  the 
deposits  and  checks  are  totaled  and  a  balance  struck. 
The  bank  will  be  careful  to  return  the  vouchers  that 
make  the  total  of  checks  paid,  which  amount  taken  from 
the  total  deposits  leaves  the  balance.  Formerly  it  was 
the  custom  to  have  the  paid  checks  entered  in  the  pass 
book,  but  since  the  advent  of  the  adding  machine,  they 
are  run  up  on  the  machine  and  the  balance  struck. 

It  is  obvious  that  the  depositor  will  draw  checks  and 
deduct  them  from  his  balance,  while  they  may  still  be 
outstanding  and  unpaid,  not  having  reached  the  bank 
for  payment.  And  if  the  rule  is  followed  that  as  soon  as 
a  check  is  di-awn,  it  is  considered  paid,  o\Trdrafts  will 
not  occur.  In  order  to  reconcile  a  balance  submitted 
in  this  form,  follow  these  rules: 

*  Section  326  of  the  New  York  Negotiable  Instrument?  Law  Provides: 

No  hank  shall   bo  liable   to  a  depositor  for  the  payment  by  it  of  a 

forged   or  raised   check  unless  within   one  year  after  the  return  to  the 

depositor  of  the  voucher  of  such  payment,  such  depositor  shall  notify 

the  bank  that  the  check  so  paid  was  forged  or  raised." 


86  THE  BUSINESS  MAN  AND  HIS  BANK 

Enter  all  deposits  in  your  check  book. 

Enter  all  checks  drawn  likewise.  (Many  checks  are 
drawn  when  the  check  book  is  not  at  hand,  and  a  substi- 
tute form  is  used.  Be  sure  to  enter  these  in  your  check 
book. 

From  the  total  of  your  deposits  from  time  to  time,  take 
the  total  checks  drawn,  thus  giving  you  your  balance. 

Number  all  checks  consecutively. 

Arrange  the  returned  checks  (vouchers)  in  numerical 
order  and  check  back  with  the  stubs.  Use  a  colored 
pencil  and  make  a  prominent  check  mark  on  all  paid 
stubs. 

Make  a  total  of  the  checks  outstanding  and  subtract 
this  from  the  bank  balance,  and  the  two  balances  should 
agree. 

Second:  Many  banks  are  now  rendering  monthly 
statements,  having  discarded  the  foregoing  method. 
The  reason  for  this  is  the  greater  efficiency  of  the  state- 
ment method,  inasmuch  as  it  obviates  the  tedious  work 
of  writing  up  books  periodically  (a  slow  and  labor  con- 
suming process)  and  keeps  the  work  up  to  date.  Many 
banks  render  statements  to  all  customers  monthly;  others 
monthly  to  certain  customers  only,  and  on  request  to  others. 

Where  the  statement  system  is  in  vogue,  you  will 
either  receive  your  statement  and  vouchers  through  the 
mail  shortly  after  the  first  of  the  month  or  it  will  be  ready 
upon  call.     In  this  instance, 

Check  the  deposits  shown  on  the  statement  with  your 
book. 

Check  the  checks  listed  as  paid  with  your  stubs,  also 
checking  them  with  the  list  as  furnished. 

Subtract  the  outstanding  checks  from  the  bank  bal- 
ance and  it  will  reconcile. 

In  both  cases  examine  the  checks  to  see  that  the  sig- 
natures are  genuine  and  report  promptly  any  irregulari- 
ties or  differences  to  the  bank. 


CHAPTER  X 
COLLECTING  OUT  OF  TOWN  CHECKS 

The  checks  received  by  the  bank  from  both  the  receiv- 
ing and  paying  tellers  divide  themselves  into  the  follow- 
ing classes:  (1)  Checks  on  own  bank.  These  are  checks 
received  on  deposit  by  the  receiving  teller  and  drawn 
on  his  own  bank,  and  checks  cashed  by  the  paying  teller 
which  are  also  di-awn  on  his  bank.  The  latter  are 
for  pay  rolls  and  to  obtain  cash  by  the  depositors. 
(2)  Checks  on  banks  in  the  same  town  that  will  be  paid 
through  the  clearing  house.  (3)  Checks  on  banks  in 
the  same  place  which  must  be  presented  by  messenger, 
inasmuch  as  the  bank  does  not  clear  through  the  clearing 
house.  (4)  Checks  on  out  of  town  banks.  These  must 
be  collected  through  the  mails,  and  are  commonly  called 
"transit  items." 

It  is  the  custom  of  large  city  banks  to  have  corres- 
pondent banks  in  all  important  cities,  to  which  checks, 
drafts,  notes  and  bills  of  exchange  are  sent  for  attention. 
Some  of  the  large  banks  in  New  York,  Chicago  and  other 
cities  have  such  connections  in  practically  every  city 
in  the  United  States.  They  can  therefore  send  such 
items  to  their  corresponding  banks  and  get  quick  action 
and  at  the  same  time  build  up  a  line  of  business  that  is 
mutually  profitable.  The  rates  of  exchange  charges, 
time  for  remitting,  and  other  such  details  are  arranged 
for  between  the  two,  and  the  collecting  bank  knows 
exactly  what  it  will  cost  to  collect  a  check,  note  or  bill 
of  exchange. 

Thus  the   Irving   National   Bank   in   New  York  has 

87 


88  THE  BUSINESS  MAN  AND  HIS  BANK 

connections  in  every  large  city.  The  terms  upon  which 
the  correspondent  bank  will  collect  checks  and  other 
items  in  a  certain  territory  are  agreed  upon,  and  all 
such  items  coming  into  the  Irving  Bank  will  be  sent  to 
its  representative.  The  latter  will  pay  the  Irving  on 
the  day  the  item  is  received  less  the  exchange  charge, 
if  any,  by  drawing  its  draft  on  its  New  York  correspon- 
dent. The  arrangement  might  be  that  the  collecting 
bank  will  remit  at  par  once  or  twice  a  week  for  all  collec- 
tions sent  to  it,  and  as  compensation  have  the  use  of  the 
funds  for  the  time  between  collection  and  payment. 
The  out  of  town  bank  may  have  an  account  in  the 
Irving  Bank,  and  the  latter  will  charge  all  items  sent 
out  to  it  and  credit  all  deposits  or  collections  received 
from  it  to  this  account,  which  will  be  its  ''New  York 
account"  or  reserve  account,  the  balance  counting  in 
the  out  of  town  bank's  reserve  the  same  as  cash  on  hand. 
These  various  bank  connections  are  most  important 
inasmuch  as  they  expedite  the  collection  of  bank  checks 
and  greatly  facilitate  the  business  of  the  country.  For 
instance,  it  is  much  to  the  advantage  of  the  depositor 
in  the  Irving  Bank  to  know  that  a  check  drawn  on  a 
Toledo  bank  and  deposited  by  him  wdll  go  direct  to 
Toledo  for  payment  and  not  to  Chicago,  Columbus, 
Cleveland  and  then  to  Toledo,  for  each  bank  handling 
the  check  delays  the  payment  by  at  least  a  day,  and 
holds  back  the  credit  or  the  right  to  draw  against  the 
check  by  that  length  of  time. 

Collecting  Large  Checks. 

It  often  becomes  important  to  collect  a  large  check 
with  the  utmost  dispatch  and  these  collecting  facilities 
are  of  great  value.  For  instance,  a  check  for  $50,000 
is  used  in  a  business  transaction  in  New  York.  The 
holder  wants  the  use  of  the  funds  as  soon  as  possible, 


COLLECTING  OUT  OF  TOWN  CHECKS  89 

and  the  bank  receiving  the  check  wants  to  reduce  the 
amount  to  a  usable  balance  with  the  least  delay.  In- 
asmuch as  a  check  is  not  payment  and  cannot  be  con- 
sidered paid  until  it  is  certified  or  otherwise  paid,  it  is 
highly  necessary  to  present  the  check  for  payment  at 
the  bank  drawn  on  without  delay.  It  may  be  on  a 
country  bank,  let  us  say  in  Iowa.  Here  is  where  the 
collecting  machinery  does  its  best  work.  The  transit 
man  in  the  bank  must  determine  the  shortest  and  quick- 
est way  to  obtain  payment  of  the  check.  He  may  have 
several  routes  open  to  him  and  his  knowledge  of  railroad 
time,  exchange  charges,  and  other  such  matters,  will 
come  into  play.  He  may  send  it  to  his  Iowa  corres- 
pondent and  receive  returns  in  five  days  at  par;  or  he 
may  send  it  to  his  Chicago  correspondent  and  receive 
payment  in  three  days,  less  the  exchange  charges. 
But  the  gain  in  interest  for  a  day  or  two  may  ofTset 
the  exchange  cost,  and  it  is  for  him  to  determine  in 
such  unusual  cases  the  most  profitable  method  of  hand- 
ling this  check. 

Collecting  Checks  Direct. 

The  study  of  such  collections  is  so  intricate  and  the 
possibilities  of  profit  or  loss  so  m.any  that  only  actual 
working  experience  can  make  a  well  rounded  transit 
man.  It  is  obvious  that  he  must  know  his  geography 
well,  have  definite  working  arrangements  with  his 
correspondents,  and  watch  the  details  of  his  department 
with  minute  care.  While  the  volume  of  business  is  heavy 
the  individual  profits  are  small  and  each  transaction 
carries  its  own  opportunity  for  profit  or  loss.  In  many 
cases  it  is  profitable  to  send  the  item  direct  to  the  bank 
drawn  on,  whether  it  be  a  correspondent  or  not,  and 
pay  the  costs,  on  account  of  the  quick  returns  possible 
by    direct    collections.     A    practical    illustration    will 


90  THE  BUSINESS  MAN  AND  HIS  BANK 

show  the  method  of  quick  and  direct  collection  of  checks 
on  a  distant  point :  A  theatre  manager  in  New  York  has 
large  interests  in  California.  He  transfers  funds  from 
the  West  to  the  East  by  the  following  arrangement :  He 
draws  a  check  on  his  CaUfornia  bank  and  deposits  it  in 
his  New  York  bank.  The  latter  sends  it  direct  to  the 
bank  drawn  on.  The  latter,  upon  receipt  of  the  check, 
wires  the  New  York  bank  that  payment  has  been  made 
and  draft  follows.  As  soon  as  the  wire  is  received  the 
bank  will  pay  against  the  deposit.  The  California  bank 
charges  a  special  rate  of  exchange  and  the  New  York 
bank  charges  the  account  interest  at  six  per  cent  from 
the  time  they  pay  until  the  draft  is  received  from  Cali- 
fornia. 

The  Federal  Reserve  collection  system  would  still 
further  expedite  the  transaction  as  follows:  Upon  re- 
ceipt of  the  check,  the  New  York  bank  would  deposit 
with  the  New  York  Federal  Reserve  Bank.  The  latter 
would  send  to  the  Federal  Reserve  Bank  of  San  Fran- 
cisco, and  the  latter  would  collect  and  credit  the  New 
York  Federal  Reserve  Bank  and  wire  payment,  through 
the  Federal  Reserve  special  wires.  The  New  York 
Federal  Reserve  Bank  would  notify  the  depositary  bank 
and  without  waiting  for  draft,  the  check  would  be  con- 
sidered paid,  the  book  credits  being  substituted  for 
drafts.  This  interchange  of  credits  is  the  most  help- 
ful feature  of  the  check  collection  faciUties  of  the 
Federal  banks,  it  is  a  great  time  and  money  saver, 
the  collections  being  handled  at  par. 

The  average  bank  is  too  small  to  have  all  this  ma- 
chinery, inasmuch  as  it  does  not  handle  a  volume  of 
checks  sufficiently  large  to  justify  the  expense  of  such 
a  department.  It  is  much  better  to  have  two  or  three 
correspondents  in  the  large  cities  to  which  all  out  of 
town  checks  are  sent.     Thus  a  bank  in  a  city  of  20,000 


COLLECTING  OUT  OF  TOWN   CHECKS  91 

population  will  huve  a  correspondent  in  New  York  to 
which  it  sends  all  New  York  and  surrounding  checks; 
one  in  Boston  to  which  all  New  England  items  are  sent ; 
one  in  Chicago  to  which  all  western  items  go ;  and  one 
in  the  South,  that  collects  all  its  southern  checks. 
Should  quick  returns  be  desired,  it  may  send  the  item 
direct  to  the  bank  drawn  on  and  charge  the  customer 
the  costs  of  collecting,  should  they  be  unusual. 

Therefore  as  the  checks  leave  the  teller's  cages  they 
are  sorted  into  three  or  four  batches,  listed  with  what- 
ever information  the  bank  may  elect  to  take  and  sent 
to  the  several  banks  for  attention. 


CHAPTER  XI 

EXCHANGE 

Whenever  a  check  drawn  on  an  out  of  town  bank  is 
deposited  in  a  bank,  the  depositor  is  often  required  to 
pay  ''exchange."  What  this  charge  represents  and 
what  is  the  basis  for  its  exaction  is  a  mystery  to  many. 
Let  us  see  what  the  term  means  in  its  simplest  analysis. 

The  obligation  of  a  bank  is,  as  we  have  seen,  to  pay 
checks  drawn  on  it  in  currency.  This  it  will  be  obliged 
to  do  if  the  checks  are  presented  over  the  counter. 
But  it  is  impossible  for  the  holder  to  so  present  most  of 
the  checks  received  and  the  work  of  presenting  is  dele- 
gated to  banks  which  make  the  presentment  through 
the  mails.  This  is  particularly  true  of  out  of  town 
checks  that  cannot  be  collected  through  the  medium  of 
the  clearing  house.  As  a  matter  of  fact,  the  holder 
of  a  check  merely  wants  credit  for  the  amount,  against 
which  he  may  draw,  and  is  not  concerned  about  the 
manner  in  which  the  collecting  bank  receives  pajonent. 
What  the  collecting  bank  wants  is  not  currency,  for  as 
a  rule  banks  in  the  smaller  places  receive  more  cash 
than  they  can  use  in  their  local  transactions  and  find 
it  necessary  to  ship  the  surplus  to  their  city  correspon- 
dents. A  check  on  a  city  bank  that  will  be  immediately 
credited  to  its  account  is  a  much  more  desirable  form 
of  payment  than  the  money  itself.  In  the  develop- 
ment of  banking  in  this  country,  certain  cities  have 
been  selected  as  ''par  points" — that  is,  checks  drawn 
on  banks  in  these  places  are  received  at  par  everywhere, 
and  are  preferred  even  to  cash  itself.     Thus  a  check  on 

92 


EXCHANGE  93 

a  New  York  or  Chicago  bank  would  be  a  par  check  and 
be  as  readily  received  as  money. 

Creating  Reserve  Accounts. 

In  order  to  draw  checks  on  their  city  correspondents, 
the  country  banks  must  maintain  balances  in  such 
banks.  To  create  these  balances  money  must  be 
shipped  by  express,  with  its  attendant  costs.  If,  there- 
fore it  costs  a  certain  amount  per  thousand  to  create 
these  balances,  the  country  banker  argues  that  if  he 
pays  checks  drawn  on  his  bank  in  the  form  of  a  draft, 
let  us  say  on  New  York,  the  holder  of  the  check  should 
bear  his  proportionate  share  of  this  expense.  Thus, 
in  paying  a  thousand  dollar  check  the  paying  bank 
would  deduct,  say  forty  cents,  to  compensate  it  for  the 
cost  of  shipping  currency  to  make  the  check  good  when 
presented.  There  is  a  profit  in  this  charge,  for  as  a 
matter  of  fact,  the  balances  so  created  in  the  city  banks 
are  not  the  result  of  money  shipments,  except  to  a 
limited  degree,  the  bulk  of  such  balances  being  in  the 
form  of  checks  on  other  city  banks  that  will  be  paid  at 
par  and  the  only  cost  is  the  postage  and  stationery. 
And  inasmuch  as  the  charge  is  never  less  than  ten 
cents,  the  toll  collected  by  the  country  bank  for  paying 
its  checks  is  much  greater  than  the  cost  of  creating 
the  balance  drawn  against.  In  fact,  this  profit  is  often 
considerable  in  the  course  of  the  year  and  in  some  cases 
sufficient  to  pay  the  dividend.  In  a  country  bank  in 
New  York  with  deposits  of  half  a  million  this  profit  is 
over  $3,000  a  year. 

By  clearing  house  arrangements  and  rules,  member 
banks  are  not  allowed  to  bear  this  expense  for  the 
depositor  or  to  in  any  way  compensate  him  for  these 
charges.  (See  New  York  Clearing  House  rules  page 
111,112).    Therefore  the  charge  accrues  to  the  last  holder 


94  THE  BUSINESS  MAN  AND  HIS  BANK 

of  the  check,  who  is  compelled  to  pay  it  by  the  bank 
through  which  the  check  is  collected.  The  latter  must 
pay  the  toll  to  the  country  bank,  and  only  as  it  can 
"bunch"  its  checks  on  certain  banks — that  is  assemble 
such  checks  from  various  depositors  and  collect  in  one 
letter  and  as  one  amount,  for  which  it  pays  an  agreed 
rate,  can  it  make  a  profit.  It  may  charge  three  deposi- 
tors a  dollar  to  collect  their  checks  on  a  certain  bank, 
while  it  will  have  to  pay  but  60  cents.  Therein  lies  its 
profit  from  exchange.  The  real  sufferer  is  the  depositor 
who  may  or  may  not  reimburse  himself  by  adding  this 
charge  to  the  price  of  goods. 

Let  us  illustrate  by  a  typical  example:  The  First 
National  Bank  of  Spencertown,  N.  Y.  maintains  an 
account  in  the  National  City  Bank  of  New  York.  It 
ships  $20,000  in  currency  weekly  to  the  City  Bank,  but 
sends  checks  on  New  York  banks  to  the  amount  of 
$25,000  a  day.  The  cost  of  creating  this  balance  is 
therefore  the  expressage  of  $20,000 — about  $8  and 
about  $2  in  postage  and  stationery.  The  First  National 
Bank  of  Buffalo  receives  a  $1,000  check  on  the  Spencer- 
town bank,  which  it  sends  to  the  latter  for  payment. 
The  Spencertown  bank  draws  a  draft  on  the  National 
City  Bank  for  $999  and  remits  to  the  Buffalo  bank, 
which  in  turn  sends  it  to  the  Chase  National  Bank  for 
credit  to  its  account.  The  Buffalo  bank  could  have 
sent  the  check  by  express  or  messenger  and  demanded 
cash,  but  the  dollar  ''exchange"  would  be  cheaper 
and  quicker.  The  Spencertown  bank  in  substance 
says  to  the  Buffalo  Bank  "We  stand  ready  to  pay  this 
check  in  cash  at  our  counter;  but  if  you  want  a  draft 
on  New  York,  it  will,  or  has,  cost  us  $1  to  ship  the 
currency,  and  this  charge  we  exact  from  you.  You 
can  get  it  from  the  holder  of  the  check  or  not  as  you  like." 
The  rules  of  the  Buffalo  Clearing  House  prevent   the 


EXCHANGE  95 

bank  from  assuming  this  charge  and  so  it  is  charged  to 
the  depositor.  As  a  matter  of  fact,  it  may  have  cost 
only  25  cents  actually  to  create  this  thousand  dollar 
balance  in  New  York  and  the  75  cents  is  the  Spencer- 
town  bank's  profit  from  ''exchange." 

The  country  banks  have  found  this  a  profitable  line 
of  business  and  are  giving  it  up  only  under  pressure 
from  the  Federal  Reserve  Banks  which  aim  to  make 
every  bank  check  worth  its  face  value  anywhere,  as  it 
should  be.  Exchange  is  now,  as  a  rule,  charged  only 
by  a  relatively  few  country  banks. 

The  reason  why  the  city  banks  make  an  exchange 
charge  is  due  to  the  fact  that  their  country  correspon- 
dents make  the  charge  to  them.  As  a  rule  the  city 
banks  make  no  charge  where  the  check  is  paid  at  par;  and 
inasmuch  as  approximatey  two-thirds  of  the  banks  are 
now  paying  their  checks  at  par,  exchange  is  gradually 
being  eliminated  from  banking  transactions.  In  due 
time  the  Federal  Reserve  Banks  will  force  all  banks  to 
pay  their  checks  at  their  face  value. 

"Par  Points." 

It  is  a  common  error  to  treat  the  bank  check  as  cur- 
rency and  worth  par.  This  is  particularly  true  in  those 
places  where  the  exchange  question  does  not  enter  and 
all  checks  are  credited  at  par  by  the  banks,  and  the 
depositor  is  allowed  to  draw  against  the  funds  immedi- 
ately. But  there  are  certain  costs  that  attend  the 
collection  of  bank  checks  that  must  be  borne  either 
by  the  bank  or  by  the  customer.  Where  checks  are 
collected  at  par  the  bank  assumes  this  cost  and  endeav- 
ors to  compensate  itself  in  other  ways.  Where  the  ex- 
change is  charged  against  the  customer  he  of  course 
bears  the  expense. 

By  virtue  of  the  banking  arrangements  as  they  have 


96  THE  BUSINESS  MAN  AND  HIS  BANK 

developed  from  time  to  time  and  through  ruhngs  of 
the  clearing  houses  and  Federal  Reserve  Banks,  checks 
on  certain  places  are  received  at  par.  Thus  a  check 
on  a  New  York  bank  will  be  received  by  practically 
any  bank  in  the  country  at  par,  for  two  reasons:  first 
because  most  banks  keep  accounts  in  New  York  and 
want  New  York  exchange  (checks  drawn  on  New  York 
banks)  for  the  purpose  of  creating  a  balance  in  their 
New  York  bank;  and  second  because  all  New  York 
checks  are  paid  at  par  and  there  is  no  exchange  cost 
attending  their  collection.  Checks  on  certain  other 
cities,  such  as  Philadelphia,  Albany,  Boston,  Providence, 
etc.  are  also  par  points  and  no  exchange  follows  their 
collection.  Other  cities,  such  as  Syracuse,  N.  Y.,  have 
formed  agreements  among  the  banks  to  pay  all  their 
checks  at  par  and  such  checks  should  pass  anywhere  at 
par  because  there  will  be  no  exchange  deducted  when  the 
check  is  finally  paid.  Checks  which  are  collectable 
through  the  Federal  Reserve  Banks  are  also  free  from 
exchange  charges  and  are  therefore  par  checks. 


CHAPTER  XII 
PROFITABLE     AND     UNPROFITABLE     ACCOUNTS 

In  a  book  of  this  nature,  intended  for  general  circula- 
tion, it  is  impossible  to  give  more  than  a  general  sum- 
mary of  check  collection  arrangements,  leaving  it  to 
the  reader  to  take  the  matter  up  with  his  own  bank 
and  ascertain  its  exact  methods  in  this  regard.  It  will 
generally  be  found  to  have  special  arrangements  for 
its  check  collections.  One  bank  will  have  one  set  of 
rules  and  another  a  somewhat  different  set,  depending 
upon  its  location  and  its  city  connections.  It  will  also 
have  its  own  rules  regarding  exchange  charges,  uncol- 
lected funds,  balances,  interest,  and  other  such  items 
and  only  an  interview^  with  the  officers  will  give  a  clear 
understanding  of  its  rules. 

There  are  two  main  customs  in  this  regard  that  ob- 
tain generally.  The  first  is  that  the  bank  will  charge 
its  customer  the  exchange  on  checks  deposited  by 
him,  so  that  the  cost  to  it  of  collecting  his  checks  is 
merely  the  labor  and  postage,  which  in  the  aggregate 
may  be  turned  into  a  profit  from  exchange  charges. 
The  exchange  may  be  deducted  daily  from  the  deposits 
or  computed  monthly  and  charged  back.  If  the  bal- 
ance is  sufficient,  the  bank  may  also  allow  interest  on 
the  daily  balances  at  an  agreed  rate.  The  second  is 
that  the  bank  assumes  all  costs  of  collection  and  pays 
no  interest  on  the  balances.  Whether  or  not  this  proves 
profitable  depends  upon  the  balance  and  the  nature  of 
the  checks  deposited. 

There  is  another  custom  of  requiring  a  time  limit, 
7  97 


98  THE  BUSINESS  MAN  AND  HIS  BANK 

within  which  a  check  cannot  be  drawn  against.  This 
is  the  rule  in  the  Federal  Reserve  Banks,  and  is  based 
upon  the  time  necessary  to  send  the  check  to  the  place 
of  payment  and  receive  payment  in  the  form  of  a  draft 
on  a  city  bank.  In  other  words,  the  bank  will  not  pay 
against  the  check  until  it  has  reduced  it  to  "reserve." 

The  time  varies  from  one  to  twelve  or  founteen  days, 
depending  upon  the  distance  the  check  has  to  travel. 
Thus,  a  check  deposited  in  New  York  and  drawn  on 
Bridgeport,  Conn,  will  be  paid  on  the  third  day;  checks 
on  Western  cities  from  eight  to  twelve  days.  In  addi- 
tion to  the  time  limit,  there  may  also  be  an  exchange 
charge,  due  to  the  fact  that  the  paying  bank  imposes 
such  a  charge.  No  general  rules  can  be  given,  except 
those  prescribed  by  the  Federal  Reserve  Banks,  which 
see  under  Chapter  XXV. 

It  must  not  be  forgotten  that  when  a  bank  allows  a 
customer  to  draw  checks  against  uncollected  items,  it 
is  essentially  paying  a  check  before  it  has  been  paid^ — • 
in  other  words,  loaning  the  customer  the  amount  with- 
out interest  until  it  receives  credit  for  the  check.  And 
unless  the  actual  balance  is  large  enough  to  offset  such 
losses,  the  account  is  unprofitable. 

Let  us  illustrate  this  point  by  examples.  Here  is  a 
meat  house  that  maintains  a  balance  of  $10,000  without 
interest.  It  deposits  large  numbers  of  checks  drawn 
on  country  banks  within  fifty  miles  of  the  collecting 
bank.  Such  checks  aggregate  $10,000  a  week.  The 
bank  must  pay  the  country  banks  }io  of  1  per  cent,  or 
$10  weekly  in  exchange  in  order  to  reduce  these  checks 
to  New  York  funds.  This  costs  the  bank  $500  a  year 
not  including  postage,  stationery  and  clerk  hire.  The 
bank  must  keep  a  reserve  of  15%  or  $1,500  of  this 
deposit  with  its  reserve  agent  at  2%.  The  balance, 
$8,500  may  be  loaned  at  6%,  or  $510  a  year,  making 


PROFITABLE  AND  UNPROFITABLE  ACCOUNTS         99 

the  total  income  $540  from  this  account.  On  this 
basis  it  would  be  a  losing  account,  while  apparently  it 
was  a  profitable  one.  Upon  making  an  analysis  such 
as  above  outlined,  the  bank  would  be  justified  in  charging 
the  cost  of  collection  to  the  customer,  and  in  return  pay 
him  interest  on  the  balance.  It  might  then  show  a 
profit.  But  if  the  checks  could  all  be  collected  at  par — 
that  is,  all  the  banks  on  which  these  checks  were  drawn 
were  to  remit  in  New  York  funds  without  charge,  the 
account  would  be  decidedly  profitable.  But  only  a 
detailed  analysis  can  determine  whether  an  account 
that  is  active  and  deposits  large  numbers  of  checks 
daily  is  desirable  or  not. 

Here  is  another  example.  Take  the  account  of  a 
large  hotel.  The  deposits  average  $4,000  a  day,  part 
in  cash  and  part  in  checks  that  are  collectable  at  par. 
The  hotel  draws  checks  as  fast  as  deposits  are  made  and 
against  the  daily  deposit  there  are  daily  checks  that 
leave  practically  no  balance  at  the  end  of  the  day. 
Most  of  the  checks  are  on  New  York  banks  and  are  paid 
the  next  day  through  the  clearings;  but  the  bank's 
drafts  that  pay  the  checks  drawn  on  itself  are  Ukewise 
paid  the  next  day.  The  currency  deposited  by  the 
hotel  must  be  shipped  to  New  York  to  maintain  the 
balance,  and  even  in  such  a  close  working  arrangement 
it  is  extremely  doubtful  if  the  bank  breaks  even,  and 
the  account,  while  seemingly  large,  might  be  a  losing 
one. 

There  are  banks  that  work  on  the  mistaken  theory 
that  a  large  volume  of  business  is  necessarily  a  profitable 
business,  and  that  if  they  keep  a  large  force  busy  they 
must  make  money.  In  the  final  test  such  banking 
proves  unprofitable  and  the  banker  does  not  know  why. 
Other  banks  analyse  their  business,  apply  analytical 
brains  to  these  problems  and  endeavor  to  effect  a  working 


100  THE  BUSINESS  MAN  AND  HIS  BANK 

arrangement    that    will   be    satisfactory    to   themselves 
and  their  customers. 

The  factors  that  enter  into  a  satisfactory  bank  balance 
are  as  follows : 

The  average  balance;  the  nature  of  the  deposits;  the  cheek 
collecting  arrangements  of  the  bank;  the  interest  paid  on  the  balance. 

For  instance  if  your  deposits  were  all  cash,  the  bank 
could  pay  interest  and  allow  checks  to  be  drawn  immedi- 
ately upon  making  the  deposit.  If  the  checks  deposited 
were  in  the  main  checks  that  require  three  days  to 
collect  the  bank  would  be  justified  in  holding  back 
credit  on  deposits  for  three  days;  that  is,  the  deposits 
for  the  last  three  days  could  not  be  drawn  against.  If 
they  were  checks  that  required  a  week  to  collect,  then 
a  week's  deposits  should  be  held  back.  In  fairness  to 
yourself  and  the  bank  a  test  should  be  made  of  your 
account  to  determine  its  profitableness,  and  only  such 
a  test  where  all  the  elements  connected  with  it  are 
considered,  will  satisfy  the  banker  that  your  account 
results  in  a  profit. 

When  the  Federal  Reserve  Banks  began  to  collect 
checks  the  charge  was  made  per  item,  usually  1  cent 
per  check  handled.  This  was  subsequently  abandoned 
and  beginning  June  loth,  1918  checks  were  collected 
without  any  charge  whatsoever,  provided  they  were 
drawn  on  banks  which  paid  at  par. 

It  can  readily  be  seen  that  the  check  that  travels 
from  bank  to  bank  and  reaches  the  place  of  payment 
after  a  long  journey  is  a  form  of  fictitious  currency^ — 
sort  of  a  floating  credit  that  is  undesirable.  For  instance, 
you  deposit  a  check  in  your  bank  and  call  it  a  cash 
balance.  It  is  not.  The  bank  in  turn  sends  it  to  its 
correspondent  and  calls  it  reserve,  which  it  is  not. 
That  bank  in  turn  sends  it  to  its  correspondent  and 


PROFITABLP^  AND  UNPKOKITABLE  ACCOTNTS       101 

calls  it  reserve,  and  so  on  until  the  check  is  finally  paid. 
Thus  there  is  a  huge  amount  of  "check  money"  floating 
through  the  banks  all  the  time.  The  Federal  Reserve 
Bank  intends  to  reduce  checks  to  actual  balance — ^to 
get  them  paid  in  the  shortest  possible  time — ^by  sending 
by  the  most  direct  route,  just  as  the  business  man  wants 
his  mail  to  go  direct  and  not  by  a  circuitous  route. 

The  Journey  of  a  Bank  Check. 

Heretofore  in  the  attempt  to  avoid  the  exchange 
charges  and  to  favor  certain  friends  with  their  business, 
banks  have  resorted  to  indirect  routing  of  checks  so 
that  they  often  travel  for  a  week  or  ten  days  before 
reaching  the  place  of  payment.  That  this  is  utterly 
wrong  will  be  seen  from  two  illustrations  that  are 
typical  of  many.  A  check  was  drawn  on  a  bank  in 
Sag  Harbor,  L.I.,  and  sent  to  Hoboken,  N.J.  The 
Hoboken  bank  sent  it  to  New  York.  From  there  it 
should  have  gone  direct  to  Sag  Harbor  for  payment,  but 
instead  it  was  sent  by  the  New  York  bank  to  Boston^ — 
why  is  not  apparent.  From  Boston  it  went  to  Tono- 
wanda,  N.Y.  The  Boston  bank  no  doubt  had  some 
friendly  arrangement  with  the  Tonowanda  bank  and 
desired  to  give  it  some  of  its  collections.  From  Tono- 
wanda it  went  rightly  enough  to  Albany,  from  Albany 
to  Port  Jefferson;  (an  Albany  banker  previously  had 
made  a  trip  on  Long  Island  and  made  arrangements 
with  several  banks  on  the  Island  to  send  them  Albany 
business).  From  Port  Jefferson  it  went  to  Far  Rock- 
away;  Far  Rockaway  to  New  York;  New  York  to 
Riverhead  (a  few  miles  from  Sag  Harbor) ;  Riverhead 
to  Brooklyn  and  from  Brooklyn  to  the  \Aiice  of  payment. 
The  circuitous  travels  of  this  check  need  no  comment. 
Figure  up  the  many  times  it  was  handled,  indorsed, 
listed,  and  the  delay  in  its  final  redemption  with  all  its 


102  THE  BUSINESS  MAN  AND  HIS  BANK 

attendant  dangers,  and  no  other  argument  for  quick 
collection  facilities  is  needed. 

Here  is  a  case  that  came  under  the  writer's  notice  a 
few  months  ago.  A  check  was  drawn  on  the  writer's 
own  bank  (Bank  of  Rockville  Center,  L.I.)  and  deposited 
in  a  bank  three  blocks  distant.  From  there  it  went  to 
Jamaica,  L.I;  from  Jamaica  to  New  York,  New  York 
to  a  bank  two  blocks  from  the  Bank  of  Rockville  Centre; 
from  the  latter  to  the  place  of  payment, — a  journey  of 
fifty  miles  whereas  it  could  have  been  paid  over  the 
counter  in  the  next  morning's  exchanges  with  no  cost  or 
loss  of  time. 

To  obviate  such  practices  the  Federal  Reserve  Banks 
have  endeavored  to  make  direct  collections  thereby 
reducing  checks  to  available  funds  in  the  shortest  time 
possible.  To  quote  from  the  circular  of  the  New  York 
Federal  Reserve  Bank  as  of  June  1,  1918: 

Check  Collection  System  of  the   Federal 
Reserve  Bank 

Direct  Routing. 

"The  requirements  that  the  Federal  Reserve  Banks  should  collect 
checks,  etc.  was  incorporated  in  the  Act  not  only  to  provide  an  eco- 
nomical and  direct  method  of  collecting  checks  but  for  the  more  im- 
portant purpose  of  reducing  the  "float"  caused  by  indirect  routing 
of  checks  as  well  as  the  so-called  "reserves"  created  thereby. 

"We  anticipate  that  the  suspension  of  service  charges  as  planned 
will  remove  one  of  the  principal  causes  of  the  indirect  routing  of  out- 
of-town  checks.  We  beg  to  express  the  hope  that  the  member  banks 
will  co-operate  with  us  in  the  effort  to  bring  about  direct  routing. 
Balances  built  up  in  one  Federal  Reserve  district  can  be  made  im- 
mediately available,  through  the  Federal  Reserve  Bank,  without  cost, 
in  any  other  such  district  and  all  checks  should  be  routed  direct  to 
the  Federal  Reserve  Bank  of  the  district  in  which  the  first  indorsing 
bank  is  situated,  thus  materially  reducing  the  float  and  the  atten- 
dant cost  and  labor  of  the  several  banks  which  handle  the  checks. 


PROFITABLE  AND  UNPROFITABLE  ACCOUNTS        103 

"Through  the  many  branches  of  Federal  Reserve  Banks  which  are 
now  in  operation,  it  has  become  possible  to  reduce  the  time  of  collect- 
ing checks  drawn  on  these  branches  and  on  banks  situated  in  their 
district. 

"A  par  list  showing  the  banking  institutions  checks  upon  which  can 
be  collected  by  the  Federal  reserve  banks  at  par,  is  published  and 
distributed  by  the  Federal  Reserve  Board  from  time  to  time.  In 
September,  1916,  there  were  14,  656  banks  on  the  par  list;  in  Septem- 
ber, 1919,  there  were  about  21,000  and  the  number  is  steadily  increas- 
ing. It  is  believed  that  the  banks  on  the  par  list  will  include  over 
95  per  cent,  of  the  volume  of  checks  in  circulation  and  a  still  larger 
percentage  of  the  volume  of  checks  which  member  banks  in  this 
district  are  called  upon  to  collect. 

"Recognizing  the  value  to  member  banks  of  having  their  funds  on 
deposit  with  us  immediately  available  in  any  other  Federal  reserve 
district,  we  have  arranged  to  make  telegraphic  transfers  of  funds  to 
banks  in  other  Districts  absolutely  at  par,  no  charge  even  being  made 
for  the  cost  of  the  telegram.  In  order  that  there  may  be  no  delay 
in  making  these  telegraphic  transfers  and  in  transacting  other  busi- 
ness between  Federal  Reserve  Banks,  private  telegraph  lines  between 
all  the  reserve  banks  and  their  branches  as  well  as  with  the  Federal 
Reserve  Board  in  Washington  are  now  in  operation. 
When  Proceeds  of  Items  are  Available. 

"All  checks  drawn  on  banks  situated  in  New  York  City  (Borough 
of  Manhattan),  received  by  9  A.  M.  will  be  immediately  credited  at 
par  and  will  thereupon  become  available  as  reserve  or  to  pay  checks 
drawn.  Checks  drawn  on  members  of  the  New  York  Clearing  House 
Association,  however,  will  not  be  received  from  members  of  the  New 
York  Clearing  House  Association. 

"For  all  other  checks  immediate  credit  entry  at  par  will  be  made, 
but  such  credit  will  not  be  available  as  reserve  or  to  pay  checks  drawn, 
until  the  appropriate  period  indicated  on  the  time  schedule  has 
elapsed.  These  periods  are  based  on  the  mail  time  required  for  items 
to  reach  the  paying  bank  plus  the  mail  time  required  for  the  paying 
bank  to  remit  to  the  Federal  reserve  bank  of  its  district.  By  aver- 
aging the  mail  time  it  has  been  possible  to  include  all  points  in  the 
country  in  four  divisions,  namely,  1,  2,  4  and  8  days.  The  schedule 
is  subject  to  change,  and  for  convenience  it  has  been  arranged  by 
States  rather  than  by  Federal  reserve  districts. 

"Checks  drawn  on  member  banks  in  this  Federal  reserve  district 
will  be  forwarded  directly  to  such  banks  and  charged  to  their  accounts 


104  THE  BUSINESS  MAN  AND  IIIS  BANK 

after  sufficient  time  has  elapsed  for  us  to  have  received  advice  of 
payment. 

"Checks  drawn  on  non-member  banks  in  this  district  will  be  sent  to 
member  banks  wherever  satisfactory  arrangements  are  made,  or  may, 
in  our  discretion,  be  sent  direct  for  remittance. 

"Checks  drawn  on  member  or  non-member  banks  in  any  other 
district  will  be  sent  to  the  Federal  Reserve  Bank  of  such  district  for 
collection  and  settlement. 

"Unpaid  checks  not  subject  to  protest  must  be  returned  on  the 
day  of  receipt.  Protested  checks  must  be  returned  not  later  than 
the  day  after  receipt.  Unpaid  checks  must  not  be  held  for  any 
purpose  whatsoever  except  for  immediate  protest. 

Restrictions  as  to  Indorsements. 

"To  insure  direct  routing  this  bank  will  not  accept  checks  drawn 
on  a  bank  located  outside  this  district,  when  such  item  bears  the 
indorsement  of  a  bank  located  outside  of  this  district.  The  other 
Federal  reserve  banks  will  adopt  similar  rules. 

Sorting  Items. 

"In  order    to  expedite  the  forwarding  of  items,  member  banks 

are  requested  to  sort  their  items  into  the  following  classes  and  list 

each  class  on  a  separate  sheet: 

(a)  Items  drawn  on  members  of  the  New  York  Clearing  House, 
(6)   Items  drawn  on  other  banks  in  Borough  of  Manhattan, 

(c)  Items  drawn  on  one  day  points, 

(d)  Items  drawn  on  two  day  points, 

(e)  Items  drawTi  on  four  day  points, 
(/)    Items  drawn  on  eight  day  points. 

They  are  also  requested  to  print  on  their  own  checks  and  the  checks 
used  by  their  depositors  the  figure  "2"  (signifying  Federal  Reserve 
District  No.  2),  preferably  in  a  large  skeleton  figure  in  the  center  of 
the  check. 

Collectible  at  par  through  the  Federal  Reserve  Bank  oj  New  York. 

"Member  banks  are  entitled  to  place  the  words,  "Collectible  at 
par  through  the  Federal  Reserve  Bank  of  New  York,"  on  their  own 
checks  and  the  checks  used  by  their  depositors. 


CHAPTER  XIII 

COLLECTION   OF   CHECKS   THROUGH   THE 
CLEARING   HOUSE 

The  most  expeditious  method  yet  devised  for  col- 
lecting bank  checks  is  through  the  clearing  house. 
While  the  term  is  a  common  one  in  business  circles, 
the  methods  and  the  machinery  of  the  clearing  house 
are  as  Greek  to  the  great  majority.  And  yet  it  is  sim- 
plicity itself. 

When  we  speak  of  a  clearing  house,  ordinarily  the 
mind  pictures  a  fine  building  such  as  the  New  York 
Clearing  House;  but  a  clearing  house  may  be  simply 
an  organization  and  do  its  work  just  as  effectively  in  a 
12  X  16  office  as  if  its  work  were  done  amidst  marble 
and  bronze. 

The  work  of  the  clearing  house  has  an  immediate 
bearing  on  business  since  it  makes  for  efficiency  in  the 
collection  of  the  checks  deposited  and  expedites 
payment  of  checks  drawn  so  that  the  business  man  is 
interested  in  all  that  pertains  to  its  practical  operations. 
By  reason  of  the  quickness  with  which  a  check  is  paid 
through  this  instrumentality,  funds  are  placed  at  the 
disposal  of  the  depositor  in  much  quicker  time  than 
could  be  possible  otherwise.  The  working  of  the 
exchange  machinery  is  so  smooth  and  its  accuracy  so 
dependable  that  it  can  be  relied  upon  in  the  same  sense 
that  the  railroad  and  the  mails  may  be  relied  upon  to  do 
their  work  on  time.  Thus  in  depositing  a  check  any- 
where within  the  scope  of  the  clearing  machinery,  the 
depositor  may  depend  upon  the  check  being  cleared  by 
a  certain  time;  and  if  payment  is  refused  he  can  depend 

105 


106  THE  BUSINESS  MAN  AND  HIS  BANK 

upon  a  quick  return  with  the  same  assurance.  There- 
fore a  clear  understanding  of  what  the  clearing  house 
is  and  what  it  does,  and  how  it  does  it,  is  appropriate 
in  a  work  of  this  kind;  although  it  is  more  technical 
than  other  phases  of  this  work.  The  New  York  Clear- 
ing House  being  a  model  for  all  the  country,  a  review 
of  its  working  rules  and  practices  will  give  a  clear  under- 
standing of  the  work  of  a  clearing  house. 

The  Purpose  of  the  Clearing  House. 

The  purpose  of  the  clearing  house  is  well  expressed 
in  the  preamble  of  the  New  York  Clearing  House,  which 
reads  as  follows: 

"The  object  of  the  Association  shall  be  the  effecting  at  one  place  of 
the  daily  exchanges  between  the  members  thereof  and  the  payment 
at  the  same  place  of  the  balances  resulting  from  such  exchanges,  the 
promotion  of  the  interests  of  the  members  and  the  maintenance  of 
conservative  banking  through  wise  and  intelligent  cooperation." 

These  associations  are  purely  voluntary,  there  being 
no  compulsion  in  the  membership.  There  are  many 
advantages,  the  chief  of  which  is  the  daily  exchange  of 
checks  and  the  harmonious  working  together  of  the 
banks,  particularly  in  times  of  financial  stress. 

In  New  York  member  banks  must  have  a  capital  of 
at  least  a  million  dollars  and  the  entrance  fee  is  $5,000 
for  those  whose  capital  does  not  exceed  five  million, 
and  $7,500  for  those  whose  capital  exceeds  five  million. 
Trust  companies  are  admitted  on  the  same  basis  as 
banks.  Members  are  required  to  furnish  the  manager 
a  weekly  report  giving  the  average  daily  condition  and 
the  actual  condition  at  the  close  of  business  on  Friday. 
The  following  items  are  reported:  Loans,  discounts, 
investments,  reserves,  deposits  and  circulation.  These 
figures  are  published  for  the  information  of  the  public. 

The  expenses  of  the  clearing  house  are  borne  by  the 


COLLECTION  OF  CHECIvS  107 

members  in  proportion  to  the  average  amount  of  ex- 
changes sent  to  the  clearing  house  during  the  preceding 
year.  The  annual  payment  for  this  purpose  shall  not 
be  less  than  $1,000.  The  clearing  house  also  has  its 
staff  of  examiners,  who  work  independently  of  all  other 
bodies,  and  examine  only  member  banks.  These  costs 
are  levied  pro  rata  based  on  gross  assets. 

Member  banks  are  allowed  to  clear  for  other  banks 
approved  by  the  clearing  house  authorities  and  are 
charged  a  fee  of  $1,500  yearly  for  this  privilege.  They 
must  also  abide  by  clearing  house  rules  as  laid  down  for 
non  member  banks.  Banks  clearing  for  non  members 
are  liable  as  for  their  own  transactions,  until  proper 
notice  of  discontinuance  of  the  clearing  function. 

Two  clearings  are  now  made  in  New  York,  one  at 
nine  and  the  other  at  ten  o'clock.  The  balances  at  the 
nine  o'clock  clearing  are  carried  over  and  included  with 
the  ten  o'clock  figures  and  one  settlement  is  made.  Any 
errors  in  the  exchanges  and  returned  items  are  adjusted 
directly  between  the  members.  There  is  now  an  after- 
noon exchange  of  returned  items  except  those  missent, 
under  the  same  rules  and  procedure  as  at  the  morning 
clearing. 

The  Clearing  Principle. 

The  term  "clear"  may  be  expressed  in  the  slang 
"to  swap;"  and  the  bank  that  "clears"  a  check  simply 
exchanges  it  for  another  drawn  on  itself,  and  receives 
or  pays  the  difference  in  money.  Perhaps  the  idea  can 
be  best  explained  by  a  simple  illustration.  The  Chase 
National  Bank  of  New  York  holds,  at  the  end  of  the 
day,  checks  to  the  amount  of  $1,000,000  against  the 
Irving  National  Bank.  These  have  come  in  from 
various  sources,  such  as  out  of  town  depositors  and 
through  the  paying  and  receiving  tellers.     They  have 


108  THE  BUSINESS  MAN  AND  HIS  BANK 

been  sorted  out  from  all  the  other  checks  and  run  up  on 
the  adding  machine.  The  Irving  likewise  holds  checks 
received  from  similar  sources  to  the  amount  of  $500,000 
against  the  Chase.  The  ordinary  way  would  be  for 
the  Irving  bank  to  pay  its  debt  to  the  Chase  in  cash 
or  some  other  acceptable  form,  and  the  Chase  would 
pay  the  Irving  what  it  owed.  Put  any  sixteen  year 
old  boy  on  this  proposition  and  he  will  soon  see  that  if 
the  Irving  pays  the  Chase  $500,000  the  two  reciprocal 
debts  are  cancelled.  There  is  the  saving  in  the  handling 
of  one  amount  instead  of  two,  and  the  use  of  half  a 
million  in  money  against  a  million  and  a  half.  The 
bank  messengers  of  London  realized  the  value  of  this 
principle  years  ago  and  met  at  a  convenient  place  and 
exchanged  their  checks.  In  this  way  the  clearing  house 
idea  originated  and  has  obtained  ever  since.  And  if 
it  would  be  inconvenient  for  two  banks  to  settle  their 
checks  between  each  other  in  cash  what  shall  be  said 
of  the  problem  if  a  hundred  banks  were  to  attempt  to 
pay  their  mutual  debts  without  the  operation  of  this 
efficient  system? 

The  Clearing  Process. 

The  work  of  the  clearing  house  is  simple,  yet  excep- 
tionally efficient.  The  great  problem  is  to  get  the  checks 
ready  for  the  exchange  process  or  "the  clearing."  As 
the  checks  come  pouring  into  the  bank  through  the 
mails  and  the  windows  they  must  be  sorted,  into  four 
classes.  All  checks  drawn  on  the  receiving  bank  are 
sent  to  the  bookkeepers;  those  on  out  of  town  banks  are 
sent  to  the  transit  department  for  collection  through 
the  mails;  those  on  banks  in  town  and  clearing  through 
the  clearing  house  are  sent  to  the  clearing  house  depart- 
ment, and  those  to  be  presented  by  messenger  are  sent 
to  the  collection  department. 


COLLECTION  OF  CHECKS  109 

At  the  close  of  the  day  there  will  be  a  package  of 
checks  for  each  bank  in  the  clearing  house  association. 
The  amount  is  listed  by  adding  machine  and  the  total 
placed  on  the  envelope.  These  are  held  over  night  as 
"items  for  the  clearing  house"  or  "exchanges  for  the 
clearing  house,"  whichever  term  is  desired.  They  are 
treated  as  cash,  for  they  will  be  paid  the  next  day. 
The  checks  that  come  into  the  bank  through  the  mails 
during  the  night  are  also  sorted  and  added  to  the  day's 
checks,  so  that  in  the  morning  all  clearing  banks'  checks 
that  have  come  into  the  bank  are  ready  for  clearing. 
When  the  packages  are  ready  the  clearing  house  clerk 
makes  a  list  of  the  banks  against  which  he  has  checks 
for  payment  and  the  amount  against  each.  In  other 
words  he  knows  how  much  each  bank  owes  his  bank. 
These  exchanges  are  so  heavy  in  some  banks  that  it 
requires  two  men  to  carry  the  package  to  the  clearing 
house.  In  the  clearing  house  there  is  a  horseshoe 
arrangement  of  desks,  behind  which  sit  clerks  from  the 
various  banks.  Their  duty  is  to  receive  the  checks 
drawn  against  their  banks.  Therefore  each  bank  has 
a  man  at  the  clearing  house  laden  dowm  with  the  checks 
his  bank  holds  on  other  banks,  and  a  man  to  receive 
the  checks  drawn  against  his  bank. 

The  clearing  is  done  on  the  tick  of  the  clock  and  when 
the  gong  strikes  the  line  begins  to  move.  The  clerk 
standing  in  front  of  the  desk  of  the  National  City  Bank, 
for  instance,  will  deliver  his  package  against  the  City 
bank  and  take  the  initials  of  the  clerk  receiving  the 
package  on  his  sheet.  He  steps  to  the  next  desk  and 
repeats  the  operation,  so  that  when  he  has  gone  the 
rounds,  he  w^ill  be  before  the  desk  he  started  from,  with 
empty  wallet.  Meanwhile  the  receiving  clerk  from  the 
same  bank  has  received  all  the  checks  drawn  against 
his   bank.     Knowing    w^hat    the   bank   brought    to    the 


110  THE  BUSINESS  MAN  AND  HIS  BANK 

clearing  house  from  the  sheet  heretofore  mentioned, 
and  having  all  the  checks  against  the  bank  he  can 
quickly  tell  whether  his  bank  owes  the  other  banks  or 
they  owe  him.  The  figures  on  the  sheets  are  sent  to  the 
manager  on  tickets  as  the  men  enter  the  clearing  house, 
so  that  the  manager  makes  his  own  calculations,  which 
must  tally  with  the  work  on  the  floor. 

In  a  few  minutes,  usually  less  than  ten,  the  whole 
clearing  process  is  over  and  the  clerks  begin  to  make 
their  proofs.  When  the  work  is  in  proof  the  day's  work 
is  done.  Forty-five  minutes  is  allowed  for  the  clearing 
and  the  proof. 

The  checks  have  in  the  meantime  been  taken  to  the 
bank  and  are  ready  for  examination  and  payment. 

If  the  bank  owes  the  other  banks  it  pays  the  amount 
direct  to  the  clearing  house,  and  the  clearing  house 
distributes  it  to  the  banks  entitled  to  it;  and  if  the  bank 
is  creditor  to  the  other  banks,  it  receives  from  the  clear- 
ing house  the  amount  due  it  in  one  sum.  In  short,  the 
banks  pay  the  clearing  house  what  they  owe  and  the 
clearing  house  pays  the  banks  what  they  have  due  them, 
in  one  sum,  rather  than  have  many  payments  among 
themselves. 

In  some  places,  notably  New  York,  these  settlements 
are  now  made  by  debiting  or  crediting  the  amounts  to 
the  accounts  of  the  various  banks  in  the  Federal  Reserve 
Bank,  thus  avoiding  the  use  of  money,  or  its  representa- 
tive, entirely. 

The  rule  is  that  the  banks  pay  what  is  against  them, 
irrespective  of  whether  the  checks  are  good  or  not; 
these  adjustments  being  made  directly  between  the 
banks. 

Missent  items  must  be  returned  to  the  bank  making 
the  error  direct  by  hand  and  not  through  the  exchanges. 

The  settlements  between  member  banks  are  made  in 


COLLECTION  OF  CHECKS  111 

gold,  gold  notes,  greenbacks,  clearing  house  certificates, 
or  by  adjustment  thi*ough  the  balance  of  some  other 
member  bank  or  the  Federal  Reserve  Bank,  (the  latter 
now  prevailing).  (Clearing  house  certificates  are  cer- 
tificates issued  against  gold  and  lawful  money  deposited 
with  the  clearing  house,  and  are  equivalent  to  the  money 
itself.     This  obviates  the  handling  of  the  money). 

Member  banks  are  not  allowed  to  send  through  the 
exchanges  checks,  drafts,  notes  or  bills  of  exchange 
having  a  qualified  or  restrictive  indorsement  thereon, 
such  as  ''for  collection"  or  ''for  account  of"  or  "pay 
any  bank  or  banker"  or  similar  indorsements,  unless 
all  indorsements  thereon  are  guaranteed  by  the  bank 
sending  the  same  through'  the  clearing  house.  The 
interest  rates  on  deposits  are  regulated  by  the  clearing 
house  and  the  intent  is  to  prevent  undue  and  costly 
competition  for  business  by  such  inducements. 

The  members  and  non  members  clearing  through  the 
clearing  house  are  not  allowed  to  pay  exchange  or  other 
charges  or  to  allow  time  in  connection  with  the  collection 
of  checks  collectable  through  the  Federal  Reserve  Bank, 
but  collected  through  other  channels,  in  excess  of  the 
charges  which  would  have  been  payable  or  the  time 
allowed  had  such  item  been  collected  through  the 
Federal  Reserve  Banks.  There  is  a  scale  of  fines  from 
one  to  10  dollars  imposed  upon  member  banks  for  various 
offences,  such  as  errors  in  the  work  brought  to  the  clear- 
ing house,  errors  in  the  work  at  the  clearing  house, 
errors  in  footings,  disorderly  conduct,  delay,  failure 
to  pay  the  balances  within  the  time  limit,  missent  items, 
etc.  These  fines  are  for  the  purpose  of  keeping  the  work 
up  to  a  high  state  of  efficiency. 

The  clearing  house  regulates  the  charges  to  be  made 
by  the  member  and  non-member  clearing  banks  for  the 
collection  of  checks  and  other  items.     These  charges 


112  THE  BUSINESS  MAN  AND  HIS  BANK 

are  from  j-i  to  >^o  of  one  per  cent.,  according  to  the 
place  drawn  on  and  the  nature  of  the  item.  Some  points 
are  discretionary.  The  minimum  charge  is  ten  cents, 
but  checks  on  the  same  point  may  be  treated  as  one 
amount  and  the  charge  figured  on  the  total.  These 
costs  are  passed  on  to  the  depositor,  for  by  the  rules 
of  the  clearing  house  they  are  collectable  at  the  time 
of  the  deposit  and  not  later  than  the  tenth  of  the  follow- 
ing month.  No  bank  is  allowed  to  make  any  abate- 
ment of  these  charges,  or  rebate  or  return  of  the  same, 
or  in  any  other  way  to  allow  them.  The  penalty  is 
$5,000  for  breach  of  this  rule. 

Since  1917  the  New  York  Clearing  House  has  main- 
tained a  department  for  the  collection  of  non-clearing 
house  items  on  certain  individuals,  firms  and  corpora- 
tions in  New  York  City.  Such  checks  are  deposited 
with  the  clearing  house  and  a  receipt  is  issued  in  return, 
which  is  payable  through  the  exchanges  the  next  day. 
These  collections  are  made  by  messengers. 


CHAPTER     XIV 
OVERDRAFTS 

On6  of  the  most  delicate,  as  well  as  the  most  annoying 
features  that  affect  the  bank  and  the  business  man  is 
overdrafts.  Every  bank  has  it  to  contend  with,  and 
has  to  find  a  solution  as  best  it  can.  Many  an  over- 
draft is  created  innocently,  while  others  are  the  result  of 
"sailing  too  close  to  the  wind."  The  merchant  who  is 
doing  a  steady  business  which  brings  in  a  daily  amount 
of  cash,  frequently  draws  checks  in  anticipation  of  his 
daily  receipts.  If  for  any  reason  these  are  curtailed  or 
his  collections  are  slow,  the  theory  that  his  daily  deposits 
will  offset  his  daily  checks,  does  not  work  out.  For 
instance,  a  hotel  doing  an  average  business  of  $2,000 
per  day  may  find  its  receipts  for  a  few  days  less  than 
anticipated,  and  consequently,  the  checks  will  be  pre- 
sented faster  than  the  deposits  are  made.  This  condi- 
tion compels  the  bank  either  to  refuse  the  checks,  or 
to  allow  an  overdraft.  It  must  be  clearly  understood 
that  an  overdraft,  if  allowed,  is  a  courtesy  only,  and  the 
depositor  has  no  right  legally  or  morally  to  expect  the 
bank  to  honor  checks  unless  the  account  is  good  for  the 
amount. 

We  have  seen  what  the  contract  of  the  bank  with  the 
depositor  is,  namely  that  it  will  pay  checks  in  the  sum 
ordered,  to  the  party  designated,  provided  his  account 
is  good  for  the  amount  at  the  time  the  checks  are  pre- 
sented, but  it  is  under  no  obligation  to  honor  a  check 
which  is  not  supported  by  a  bank  balance.  The  busi- 
ness man  cannot  expect  the  bank  to  call  him  up  and 

8  113 


114  THE  BUSINESS  MAN  AND  HIS  BANK 

notify  him  that  certain  checks  are  presented  and  are 
awaiting  payment,  for  such  a  practice  would  necessi- 
tate the  employment  of  a  clerk  who  did  nothing  else 
but  follow  up  short  accounts. 

An  overdraft  is  a  loan  without  security,  and  is  not  in 
favor  with  the  courts.  Being  regarded  as  a  loan  and 
due  on  demand,  it  may  be  sued  upon.  Where  a  bank 
refuses  to  pay  a  check  because  of  insufficient  funds,  no 
presumption  arises  that  the  check  remains  outstanding 
for  payment.  The  bank  is  under  no  obligation  to 
reserve  from  future  deposits  an  amount  sufficient  to  pay 
the  sum.  It  frequently  happens  that  a  customer  upon 
finding  that  the  account  is  short  will  leave  the  check  with 
the  bank  for  collection.  It  thus  becomes  in  the  nature 
of  a  standing  presentment,  and  the  bank  would,  of 
course,  be  obliged  to  pay  the  same  out  of  the  first  deposits 
that  would  create  a  balance  large  enough  to  warrant 
payment. 

The  drawing  of  a  check  by  a  depositor  in  an  amount 
larger  than  he  has  on  deposit  has  been  held  to  imply 
a  promise  on  his  part  to  repay  the  amount  overdrawn, 
and  the  bank  may  recover  thereon.  In  the  absence  of 
an  agreement,  the  bank  cannot  collect  interest  on  an 
overdraft  until  the  money  has  been  demanded  and  the 
payment  refused,  but  after  demand  has  been  made, 
the  interest  will  run  as  of  that  date.  During  the  past 
two  or  three  years,  there  has  been  a  concerted  movement 
to  eliminate  overdrafts,  and  the  comptroller  of  the 
currency  has  forbidden  national  banks  to  allow  customers 
to  overdraw.  This  is  a  step  in  the  right  direction,  and 
if  enforced,  is  often  because  the  bank  has  no  other 
alternative. 

If  therefore,  as  a  business  man  you  would  keep  in  the 
good  graces  of  your  banker,  do  not  ask  him,  or  expect 
him  to  allow  overdrafts;  and  if  your  checks  are  returned 


OVERDRAFTS  115 

because   the   balance   is   insufficient,   you,   and   not   he, 
are  to  blame. 

There  has  recently  been  enacted  in  New  York  a  law 
to  the  effect  that  the  drawing  of  a  check  against  an 
insufficient  balance  is  a  misdemeanor  and  is  a  penal 
offence.  In  other  words,  if  the  depositor  has  not  the 
funds  on  deposit  at  the  time  the  check  is  drawn,  and 
it  is  returned  unpaid,  and  remains  unpaid  for  ten  days 
after  protest  or  demand,  action  may  be  brought  for 
having  committed  a  crime.  This  law  has  been  availed 
of  in  many  instances,  complaint  having  been  lodged 
with  the  District  Attorney  as  for  any  other  crime,  and 
indictment  and  trial  have  followed.  Altogether  it  is  a 
much  needed,  if  drastic,  law. 


CHAPTER  XV 
PROTEST 

The  business  man  will  not  deal  long  with  his  bank 
before  he  receives  checks  returned  unpaid  and  ''pro- 
tested." This  feature  of  banking  is  closely  associated 
with  checks  and  their  collection,  and  at  the  same  time 
applies  to  notes  and  drafts  that  are  unpaid  at  the  time 
they  are  due.  Let  us  see  what  protest  means,  legally 
and  practically. 

When  the  protested  check,  note  or  draft  comes  back  it 
will  have  attached  to  it  a  paper  and  carry  a  fee  of  from 
75  cents  to  $1.50.  The  business  man  may  rebel  at  this 
charge  and  conclude  that  it  is  part  of  the  bank's  "graft" — 
an  easy  way  to  make  money.  Whether  this  is  true  or 
not  is  not  the  present  issue;  but  it  may  more  properly 
be  called  a  penalty  for  failing  to  keep  a  contract. 

When  a  check  or  a  note  is  indorsed  the  indorser 
warrants  among  other  things  that  he  will  pay  it,  if  the 
instrument  is  presented  according  to  its  terms,  at  the 
place,  at  the  time  and  to  the  party  obligated  to  pay  it 
and  payment  is  refused,  and  the  necessary  steps  are 
taken  upon  the  dishonor.  Now  what  are  the  ''necessary" 
steps?  They  are  that  it  shall  be  presented  according 
to  its  terms  and  notice  of  its  dishonor  sent  to  the  several 
parties  thereto.  The  course  of  such  a  transaction 
would  be  as  follows:  here  is  a  check  drawn  on  the 
First  National  Bank  of  New  York.  It  is  properly 
dated,  signed,  etc.,  and  is  presented  to  the  bank,  having 
been  received  through  several  other  banks  which  have 
indorsed  it.     The  maker  is  not  good  for  the  amount. 

116 


PROTEST  1 1 7 

Payment  is  refused.  The  bank  presenting  is  bound  to 
protest  the  instrument  if  it  would  hold  the  indorsers 
through  whose  hands  it  passed.  Therefore  the  bank's 
notary  enters  in  his  protest  book  notation  to  the  effect 
that  the  check,  describing  it,  was  presented  on  a  certain 
day,  at  the  place  named,  and  payment  was  refused. 
This  is  called  the  "notation  of  protest."  He  must 
promptly  notify  the  prior  parties,  or  lose  the  rights 
against  them.  He  therefore  sends  a  notice  of  protest 
to  each  one.  This  notice  merely  testifies  to  the  fact 
that  presentment  was  duly  made,  and  payment  refused. 
Not  having  the  addresses  of  all  the  indorsers,  he  sends 
the  notices  to  the  party  from  whom  he  received  the 
check,  enclosing  the  notices  to  the  other  indorses  for 
his  indorser  to  forward.  They  in  turn  have  the  same 
time  as  he  to  forward  the  notices. 

Time  of  Notice. 

It  is  important  that  the  law  be  followed  if  protest 
and  notice  of  nonpayment  is  to  be  effective.  The 
time  is  as  follows:  If  the  party  giving  and  the  party 
receiving  the  notice  live  in  the  same  place,  it  must 
reach  the  latter  during  the  next  business  day.  If  the 
party  giving  and  the  party  receiving  the  notice  live  in 
other  places,  the  notice  must  be  mailed  during  the  next 
business  day  after  dishonor.  This  mailing  may  be  done 
at  any  branch  post  office  or  in  any  letter  box  under  the 
control  of  the  post  office.  If  this  is  properly  and 
promptly  done,  the  indorsers  are  bound  to  pay  the 
amount  to  the  holder.     If  not  they  are  released. 

The  practical  reason  is  that  the  indorser,  having 
prompt  notice  of  the  nonpayment  of  an  instrument 
which  has  passed  through  his  hands  may  protect  him- 
self. Here  for  instance  is  a  note  made  by  a  grocer  in 
Ohio,  payable  to   a  jobber  in   New   York.      It  is  dis- 


118  THE  BUSINESS  MAN  AND  HIS  BANK 

counted  by  the  jobber's  bank  and  sent  to  the  maker's 
bank  five  days  before  it  is  due,  for  payment.  On  the 
day  it  is  due  the  note  is  not  paid  and  the  bank  holds 
it  over  for  a  few  days,  and  sends  it  back  unpaid.  Be- 
fore the  note  reaches  the  jobber  the  maker  goes  into 
bankruptcy,  and  the  jobber  has  no  redress,  nor  could 
he  act  promptly,  because  he  had  no  knowledge  of  the 
nonpayment.  Had  he  been  notified  promptly,  he 
might  have  withheld  a  shipment  of  goods  about  to  go 
forward.  He  might  have  levied  on  property  of  the  mak- 
er— in  many  ways  he  might  have  protected  himself. 
Ignorance  of  the  note's  fate  injured  him,  and  in  law  and 
equity  he  should  be  released  from  his  obligation  as 
indorser. 


CHAPTER  XVI 
CREDIT  AND  BANKING 

The  ultimate  end  of  banking  is  to  make  money. 
For  this  purpose  the  bank  is  organized  and  to  this  end 
it  is  operated.  The  stockholders  have  invested  their 
money  in  the  enterprise  with  dividends  in  mind,  and 
they  demand  as  their  lawful  and  financial  right  reim- 
bursement for  their  investment  and  their  risk. 

However  much  the  bank  may  play  the  role  of  a  pub- 
lic benefactor,  a  business  convenience  and  a  commercial 
necessity,  it  must,  in  the  last  analysis,  prove  a  profit 
maker,  else  it  becomes  not  only  a  losing  venture  for 
its  stockholders,  but  a  menace  to  the  well  being  of  the 
financial  world.  If  it  makes  money  for  itself,  it  natur- 
ally becomes  a  strong  and  safe  institution;  but  if  it 
is  not  successfully  operated  it  jeopardizes  the  funds 
of  its  creditors  as  well  as  its  own.  Therefore  for  its 
own  as  well  as  for  the  sake  of  its  depositors  it  must 
operate  profitably.  In  order  to  operate  successfully 
it  must  have  an  income  that  is  certain,  steady,  and  of 
sufficient  volume  to  pay  expenses,  meet  the  inevitable 
losses,  and  leave  a  margin  of  profit  sufficient  for  divi- 
dends and  for  building  up  a  reserve  or  surplus  fund. 

A  bank  has  one  principal  source  of  income — interest. 
This  comes  from  investments  in  bonds  and  other  se- 
curities,   mortgages,  and    from    loans    and    discounts. 

Some  banks  are  large  holders  of  securities  for  the  rea- 
son that  there  is  not  enough  local  demand  to  absorb  their 
funds,  and  as  a  result  the  accumulations  of  money  are 
invested   in   securities.     These   may   be   called    ''bond 

119 


120  THE  BUSINESS  MAN  AND  HIS  BANK 

holding  banks."  Many  country  banks  are  of  this  class, 
although  there  are  some  large  city  banks  also  of  this 
character,  having  become  so  from  choice.  There  are 
others  which  may  be  called  ''discounting  banks," 
the  bulk  of  their  investments  being  in  the  form  of  dis- 
counts for  customers,  and  in  commercial  paper  bought 
in  the  market.  Savings  banks  are  large  holders  of 
bonds  of  various  kinds,  and  are  large  lenders  on  mort- 
gage security,  in  fact,  together  with  the  insurance  and 
title  companies,  they  are  the  leading  factors  in  the  mort- 
gage market.  But  whether  the  income  is  from  bonds, 
mortgages,  or  promissory  notes,  it  is  interest,  and  such 
income  constitutes  the  principal  earning  power  of  the 
bank.  Therefore  to  earn  money  the  bank  must  lend 
money,  and  only  as  it  lends  or  invests  (which  is  essenti- 
ally the  same  thing),  can  it  earn. 

The  Science  of  Banking. 

The  science  of  banking  consists  of  lending  money  and 
getting  it  back  again.  Rarely  if  ever  does  a  bank  fail 
through  its  bond  investments.  It  is  in  the  loans  that  it 
meets  its  losses  or  makes  its  profits,  and  by  the  char- 
acter of  the  loans  and  the  loaning  policy  it  may  fairly 
be  judged.  Some  banks  require  security  for  everj^ 
loan  and  some  require  little  or  no  security  at  all.  Some 
bank  men  are  good  credit  men,  and  some  never  acquire 
the  credit  sense.  Some  select  their  risks  with  care  and 
intelligence,  and  some  depend  upon  luck  and  a  kind 
providence  to  bring  back  the  loaned  money. 

It  is  obvious  that  the  business  man  should  not  deal 
with  a  bank  that  is  loose  in  its  credits;  for  while  it  may 
be  to  his  advantage  to  borrow  at  will,  it  is  likewise  to 
his  peril.  Neither  does  he  want  to  deal  with  a  bank 
that  requires  a  dollar  of  good  security  for  a  dollar's 
worth  of  credit.     He  wants  the  bank  to  use  the  same 


CREDIT  AND  BANKING  121 

degree  of  care  that  he  uses  or  ought  to  use  in  his  own 
affairs.  He  wants  a  helpful,  but  safe,  bank,  one  that 
knows  a  legitimate  business  risk  and  is  willing  to  take  it. 
The  bank  expects  its  customers  to  borrow,  for  only 
by  so  doing  can  it  be  helpful  to  them  and  profitable  to 
itself.  It  is  willing  to  risk  its  money,  or  to  be  correct, 
the  money  of  its  depositors  and  stockholders,  with  that 
of  the  borrower  in  legitimate  business  enterprises.  It 
will   go   partner   with   those   whom   it   learns   to    trust. 

Credit  and  Business. 

Credit  and  business,  and  credit  and  banking  are  so 
closely  associated  that  unless  the  business  man  under- 
stands the  fundamental  principles  of  credit  as  they 
apply  to  banking,  he  cannot  get  the  banker's  viewpoint 
and  thereby  loses  the  banker's  support  and  cooperation 
in  his  business  affau's.  On  the  other  hand,  unless  the 
banker  understands  business  and  business  methods,  he 
cannot  run  a  safe  or  a  helpful  bank. 

It  is  only  as  credit  is  studied  in  its  broad  aspects, 
and  its  benefits  analyzed  to  the  last  minute  detail 
that  its  importance  and  beneficial  results  to  the  busi- 
ness world  can  be  appreciated.  Any  attempt  to  place  a 
value  upon  these  vast  benefits  would  prove  futile,  and 
will  not,  therefore,  be  attempted,  but  it  may  prove  help- 
ful if  we  picture  the  business  world  without  the  element 
of  credit.  In  the  first  place  there  would  be  no  banks, 
for  these  are  credit  institutions  to  the  last  degree.  No 
money  would  be  invested  by  the  stockholders  and  no 
deposits  would  be  made  by  the  public  if  the  factor  of  trust 
did  not  exist  between  the  bank  and  its  stockholders  and 
depositors.  Therefore  there  could  be  no  banks.  There 
would  be  no  paper  money,  for  paper  money  is  a  form  of 
credit — trust  in  the  Government,  or  trust  in  the  bank, 
that    the    promise    expressed    thereon    will    be    fulfilled. 


122  THE  BUSINESS  MAN  AND  HIS  BANK 

Merchants  dealing  with  one  another  would  have  to  do 
so  on  a  cash  basis,  this  cash  being  metallic  money.  No 
goods  could  be  sold  on  time.  The  manufacturer  would 
not  have  time  to  turn  the  raw  material  into  finished 
product  before  paying  for  his  supplies.  The  jobber 
could  not  open  account  with  his  customer,  allow  him 
to  place  the  goods  on  sale,  and  receive  his  pay  in  due 
course  from  the  proceeds  of  the  sales. 

The  retailer  could  not  open  account  with  his  customer 
and  allow  him  to  buy  goods  and  pay  for  them  as  the 
consumer  earned  his  money.  Great  corporations  such 
as  railroads,  gas  and  electric  companies,  manufacturing 
concerns,  etc.,  could  not  borrow  money  for  buying  land, 
rails,  cars,  machinery  and  other  equipment  necessary 
to  operate,  by  selling  their  bonds.  Governments  could 
not  borrow  money  to  erect  buildings,  build  battleships, 
equip  armies  and  wage  war.  States  could  not  borrow 
to  build  roads,  bridges;  asylums,  and  other  public 
works.  Cities  could  not  pave  streets,  build  sewers, 
water  systems,  parks  and  docks.  Individuals  could  not 
build  homes  and  pay  for  them  out  of  their  daily  earnings. 
In  short,  the  element  of  credit  touches  all  we  are,  all 
we  do,  and  all  we  hope  to  have.  Credit  is  the  main- 
spring of  life's  activities,  the  bed  rock  on  which  indi- 
viduals, communities  and  nations  build  their  business 
structure.     It  is  the  life  blood  of  our  material  existence. 

Credit  Defined. 

There  have  been  many  definitions  of  credit,  some 
expressive  and  some  vague,  but  the  most  inclusive  of 
all  is  ''a  present  right  to  a  future  payment."  Get  the 
idea.  In  the  conduct  of  business  we  handle  many 
things,— things  that  exist  and  things  that  do  not  exist. 
We  buy  and  sell  the  articles  of  life  freely,  but  we  can 
buy  and  sell   the  rights  to  these  articles  just  as  truly. 


CREDIT  Ax\D   HANKING  123 

"  Rights." 

Occasionally  on  the  stock  exchanges  there  apj^ear 
what  are  termed  "rights" — that  is,  some  corporation 
has  offered  its  stock  to  the  stockholders  at  a  certain 
price,  usually  below  the  intrinsic  value.  The  stock- 
holders of  the  concern  and  they  only  have  the  right 
to  buy  the  stock  at  the  figure  named;  but  those  who  do 
not  wish  to  avail  themselves  of  the  privilege  may  sell 
their  right  to  subscribe,  and  this  right  is  as  enforceable 
as  the  ownership  of  the  stock  itself.  These  "rights" 
are  offered  the  public  at  a  certain  price  and  are  traded 
in  as  freely  as  the  stock  itself. 

If  I  hold  a  promissory  note  of  an  individual,  I  hold 
nothing  but  a  piece  of  paper — a  right.  This  right  is 
to  collect  the  debt  when  due.  I  can  sell  this  right  by 
"discounting"  or  selling  the  note  to  another.  I  merely 
sign  my  name  across  the  back  and  give  it  to  him  for 
value  and  he  in  turn  has  the  right  to  collect.  He  may 
take  the  note  to  the  bank  and  discount  it.  The  bank 
now  has  the  right  and  can  enforce  it.  The  real  thing 
is  the  payment  which  is  to  be  made  at  the  time  stipu- 
lated. The  evidence  of  the  right  to  receive  the  real 
thing  is  the  note,  and  if  the  note  is  not  paid  according 
to  its  terms  I  sue  the  maker  to  enforce  my  right  to  col- 
lect the  real  thing.  These  present  rights  to  future 
payments  are  surrounded  by  the  powerful  arms  of  the 
law.  If  you  do  not  respect  the  law  as  a  collector  of 
debt  just  get  in  debt. 

Forms  of  Credit. 

Let  us  briefly  review  the  forms  of  credit  as  they  exist 
in  business  and  banking  transactions. 

These  forms  of  credit  can  best  be  seen  by  a  simple 
illustration,  which  I  have  used  elsewhere  and  have  yet 
to  find  a  better  one.     I^et  us  assume  that  a  farmer  drives 


124  THE  BUSINESS  MAN  AND  HIS  BANK 

into  town  with  a  load  of  produce  and  after  due  negotia- 
tion with  the  produce  dealer  settles  upon  the  prices. 
The  form  of  payment  must  then  be  determined.  The 
dealer  says  to  the  farmer:  ''I  will  give  you  credit  for 
this"- — ^meaning  he  will  open  a  book  account  with  the 
farmer  and  credit  him  the  amount,  thus  making  the 
farmer  the  creditor,  and  the  dealer  the  debtor.  The 
only  evidence  is  a  memorandum  of  sale  and  the  open 
account  on  the  dealer's  books,  commonly  called  an 
account  payable- — ^a  liability.  On  the  farmer's  books 
it  would  be  the  reverse  and  become  an  account  receiva- 
ble— an  asset. 

The  terms  of  credit  may  be  as  agreed  upon,  ten  days, 
a  month  or  two,  but  not  as  a  rule  longer  than  three 
months. 

''No",  says  the  farmer,  I  do  not  care  to  have  this 
transaction  an  open  account.  I  am  willing  to  trust 
you,  but  I  want  some  better  evidence  than  the  invoice 
of  the  transaction — I  want  something  I  can  use  until 
you  pay  for  the  goods.  I  will  give  you  a  month's  time 
to  pay  for  these  potatoes  if  you  will  give  me  your  note." 
Here  then  we  have  the  promissory  note- — a  negotiable 
instrument.  This  is  the  absolute  promise  of  the  maker 
to  pay.  When  it  is  due,  the  dealer  cannot  set  up  a 
defense  that  the  goods  were  not  as  represented,  or  were 
short  in  weight — he  should  have  been  satisfied  on  these 
points  before  assuming  the  obligation.  If  he  does  not 
pay  the  note  when  it  is  due  the  farmer  may  at  once  be- 
gin an  action  for  the  amount.  The  note  will  prove 
itself  in  court.  He  now  has  a  better /orm  of  credit  than 
the  open  account,  and  can  sell,  or  discount,  the  note  at 
his  bank  and  have  immediate  use  of  the  money.  If 
the  maker  does  not  pay  the  note  when  due  the  farmer 
must  of  course  reimburse  the  bank,  but  his  position  is 
no  worse  than  when  he  accepted  the  note. 


CREDIT  AND  BANKING  125 

When  the  period  of  the  credit  in  the  open  account 
has  expired,  the  farmer  may  or  may  not  receive  payment. 
There  is  no  rigid  due  date  as  in  a  promissory  note,  and 
if  the  dealer  pays  within  a  few  days  of  the  expiration 
of  the  term  of  credit  it  makes  no  material  difference  to 
him.  If  he  does  not  pay,  there  will  be  the  usual  request 
for  settlement,  dunning  letters,  interviews,  etc.,  and 
when  moral  suasion  has  failed  to  collect  the  debt,  the 
farmer  may  sue  for  the  amount.  He  may  have  to  prove 
delivery  of  the  goods,  their  quality,  price,  and  the  fact 
that  payment  has  not  been  made.  The  dealer  may 
attempt  to  show  that  the  goods  were  not  as  represented, 
the  weight  short,  and  other  warranties  that  may  have 
to  be  proved  from  one  source  or  another.  In  short 
the  account  is  open  to  attack  from  various  directions. 
The  promissory  note  eliminates  all  these  doubtful 
points,  and  the  rule  is  simple:  "If  you  do  not  expect 
to  pay,  do  not  make  the  promise." 

If,  however,  the  farmer  says,  ''I  want  my  pay  now," 
the  dealer  may  give  him  another  form  of  credit  instru- 
ment, a  check  on  his  bank.  This  is  not  a  promise  but 
an  order.  It  is  as  good,  not  as  the  bank,  but  as  the 
maker  of  the  check,  and  many  checks  are  worthless, 
even  though  drawn  on  large  and  prosperous  banks. 
The  farmer  takes  the  check  to  the  bank  and  the  teller 
asks  him  if  he  will  take  the  cash  or  a  certification.  If 
he  chooses  the  latter,  he  will  surrender  his  rights  against 
the  maker  of  the  check  and  accept  the  promise  of  the 
bank.  Not  needing  the  cash  he  has  the  check  certified. 
The  bank  has  now  discharged  the  maker  of  the  check 
from  all  obligations,  and  has  itself  assumed  the  burden. 
The  maker's  account  has  been  charged  with  the  amount 
and  the  bank  has  accepted  the  debt. 

Let  us  assume  that  the  farmer  holds  the  certified 
check  a  week,  and  being  in  need  of  cash  to  pay  off  his 


126  THE  BUSINESS  MAN  AND  HIS  BANK 

farm  hands,  goes  to  the  bank  and  asks  the  bank  to 
redeem  its  promise  by  cashing  the  check.  The  bank 
thereupon  hands  out  the  amount  in  its  own  national 
bank  notes.  We  now  have  another  form  of  credit, 
no  different  in  its  obhgation  than  the  certified  check 
but  in  a  better  form.  Whereas  the  check  might  have 
been  on  flimsy  paper,  in  poor  handwriting,  the  bank 
notes  will  be  finely  engraved  on  special  paper,  in  various 
denominations,  large  or  small  as  he  may  desire,  but  an 
obligation  of  the  bank,  secured  in  the  last  analysis  by 
United  States  bonds,  but  insofar  as  the  bank  is  con- 
cerned quite  the  same  obligation  as  the  certified  check. 
(See  chapter  twenty-five  for  further  treatment  of  this 
subject).  Let  us  assume  that  the  farmer  refuses  the 
national  bank  notes,  because  of  his  ignorance  of  what 
they  are,  and  that  the  notes  are  the  obligations  of  a 
bank  which  he  distrusts,  and  asks  for  another  form  of 
currency  and  receives  Federal  Reserve  Notes.  He  now 
has  the  obhgation  of  the  Federal  Reserve  Bank,  and 
ultimately  of  the  United  States. 

Let  us  go  one  step  further  and  assume  that  the  farmer 
distrusts  all  banks  and  demands  ''real  money" — legal 
tender.  This  is  the  highest  form  of  circulating  credit 
in  this  country — no  different  for  general  purposes  from 
the  others  named,  but  with  a  standing  in  law  quite 
distinctive.  The  teller  therefore  hands  him  greenbacks, 
the  absolute  obligation  of  the  United  States  to  pay  in 
metallic  money  the  amount  represented  thereby.  He 
now  has  what  is  equivalent  to  gold,  for  the  greenbacks 
are  redeemable  in  gold  and  are  therefore  as  good  as  the 
coin  itself. 

Acceptances. 

Under  the  Federal  Reserve  System  and  the  recent 
developments  associated  with  it  there  has  come  into 


CREDIT  AND  BANKING  127 

use  a  new  form  of  credit  called  the  acceptance,  which  is 
merely  a  bill  of  exchange  or  a  draft  which  has  been 
accepted.  In  the  present  instance  the  operation  of  the 
acceptance  would  be  as  follows:  Upon  delivery  of  the 
goods  the  farmer  would  draw  a  draft  on  the  dealer  for 
the  amount  of  the  shipment.  The  dealer  would  "ac- 
cept" or  agree  to  pay  the  amount  to  the  one  to  whom  the 
draft  was  issued  by  writing  his  name  across  the  face  of 
the  bill.  Assume  for  purpose  of  illustration  that  the 
goods  were  sent  by  freight  to  the  dealer  and  he  was 
advised  that  the  draft  with  bill  of  lading  would  come 
through  the  Blank  National  Bank.  The  messenger  of 
the  bank  would  present  the  draft  or  acceptance  to 
the  dealer,  and  if  the  draft  was  accepted  by  signature 
on  the  face,  the  bank  would  surrender  the  bill  of  lading 
and  the  dealer  could  get  his  goods. 

As  soon  as  the  draft  was  accepted,  the  bank  would 
send  it  back  to  the  farmer  and  he  could  discount  it  at 
his  bank  in  the  same  manner  as  he  would  the  note  above 
mentioned.  When  the  due  date  of  the  acceptance 
arrived  the  dealer  would  need  to  have  on  deposit  at  the 
bank  where  the  acceptance  was  payable  an  amount 
sufficient  to  cover  it,  and  the  draft  would  there  be  pre- 
sented and  paid  and  the  transaction  closed. 

We  have  thus  run  through  the  gamut  of  credit,  from 
the  lowest  to  the  highest  form;  but  to  say  that  one  form 
is  better  than  another  for  practical  purposes,  is  to  express 
an  opinion  and  not  a  fact.  The  form  to  be  chosen  de- 
pends upon  the  wishes  of  the  contracting  parties. 


CHAPTER  XVII 
THE  SCIENCE  OF  CREDIT 

The  science  of  credit  is  the  estimate  of  the  proba- 
bihty  of  obhgations  being  paid;  and  to  "extend  credit" 
is  to  assure  one's  self  that  the  credit  risk  has  in  it  those 
elements  that  will  make  the  payment  of  the  obligation 
a  reasonable  certainty.  There  are  so  many  of  these 
elements  that  to  treat  each  one  properly  would  produce 
a  work  in  itself.  We  can,  however,  obtain  a  clear  idea 
of  the  banker's  viewpoint  through  a  brief  analysis  of 
each  of  the  three  great  fundamentals  of  credit,  namely 
the  moral  risk,  the  business  risk,  the  property  risk,  or, 
as  they  are  more  tersely  stated,  the  Three  Big  C's  of 
credit — character,  capacity  and  capital. 

The  banker  wants  to  know  you.  He  wants  to  know 
you  as  a  man,  with  a  reputation,  a  name  that 
stands  for  integrity,  a  personality  and  as  a  business 
head.  You  cannot  expect  the  banker  to  take  you  for 
granted,  and  because  you  know  yourself  to  be  honest 
and  capable  and  worthy,  to  have  the  banker  take  you 
at  your  own  valuation.  There  is  a  vast  difference 
between  being  a  depositor  and  a  borrower;  for  while 
one  is  as  welcome  as  the  other,  there  are  certain  formal- 
ities that  the  borrower  must  comply  with  that  do  not 
obtain  in  the  case  of  a  mere  depositor.  Banks  have 
suffered  many  losses  through  inadequate  knowledge 
of  men,  or  deception  by  them,  and  are  naturally  cau- 
tious in  dealing  with  those  whom  they  do  not  know, 
particularly  in  regard  to  loans,  A  New  York  business 
man  went  into  a  small  town  and  bought  out  an  estab- 

128 


THE  SCIENCE  OF  CREDIT  129 

lished  business.  The  bank  gave  him  valuable  help 
in  checking  up  the  prospects  of  the  business  and  the 
results  of  the  former  management.  He  made  extensive 
alterations,  put  in  new  stock,  carried  a  good  balance. 
Then  he  wanted  a  loan.  He  was  asked  for  statement 
and  references.  He  made  a  good  statement,  and  among 
his  assets  were  several  savings  bank  accounts.  The 
bank  asked  him  to  put  these  up  as  security,  and  imme- 
diately he  took  offence,  as  a  reflection  upon  his  credit. 
The  trouble  lay  in  the  fact  that  the  bank  did  not,  and 
could  not  in  so  short  a  time,  know  the  man.  His  attitude 
was  wTong  and  the  bank's  right;  and  he  had  no  reason 
to  expect  a  decision  otherwise  until  he  had  become 
established. 

Credit  is  Sensitive. 

Credit  is  a  very  sensitive  thing.  It  responds  to  the 
smallest  influences  and  is  helped  or  injured  by  the 
most  trivial  happenings.  Let  every  business  man  mark 
this:  the  banker  watches  you.  He  knows  your  methods. 
He  knows  if  you  are  honest  or  tricky.  He  knows 
whether  you  are  making  money  or  not.  He  can  tell 
by  your  bank  account  how  you  stand  with  your  creditors. 
There  is  a  free  masonry  among  banks  and  they  exchange 
information  readily  for  the  common  good.  What  you 
do  in  one  bank  gets  back  to  the  other.  The  surest  sign 
of  business  trouble  is  short  checks.  Just  as  soon  as  a 
bank  begins  to  send  checks  back,  it  restricts  credit. 
The  "go-backs"  as  they  are  called  are  the  barometers 
of  business.  They  tell  the  story  of  a  business  ''going 
back." 

The  banker's  yardstick  is  different  from  your  own. 
It  measures  men  from  the  outside  and  not  from  within. 
It  measures  men  by  an  analysis  of  what  they  do  and  have 
and  not  by  what  they  think  they  are.     Until  you  have 


130  THE  BUSINESS  MAN  AND  HIS  BANK 

established  yourself  in  the  mind  of  the  banker  you  can- 
not expect  him  to  lend  you  money.  How  many  a 
time  banks  are  confronted  with  this  proposition!  "If 
you  will  lend  me  this  money  I  can  make — ever  so  much:" 
says  the  would  be  borrower.  ''Very  good"  says  the 
banker,  ''but  how  much  of  your  own  money  are  you 
risking?  We  cannot  stake  you  if  you  do  not  stake  your- 
self. And  until  we  believe  more  fully  in  you  we  cannot 
trust  you." 

In  a  certain  board  meeting,  a  loan  was  under  discus- 
sion. The  applicant  was  in  good  favor  with  the  board 
members  and  his  previous  transactions  had  all  been 
satisfactory.  Incidentally  one  of  the  members  remarked 
that  the  borrower  was  a  frequenter  of  road  houses  and  a 
good  spender.  He  ''rolled  high"  to  use  the  slang;  and 
immediately  the  whole  atmosphere  was  changed  from 
favor  to  opposition,  and  the  loan  was  declined.  Credit 
is  a  very  sensitive  thing. 

The  Business  Risk. 

The  greatest  asset  that  any  man  can  have  is  business 
abihty — that  plant  of  slow  growth  that  produces  such 
wonderful  flowers.  It  matters  not  how  keen  a  sense 
of  business  integrity  he  may  have,  or  that  he  be  as 
"honest  as  the  day  is  long,"  his  honesty  and  integrity 
may  be  negative  virtues  that  stand  for  nothing  but 
cold  interrogation  marks.  The  thing  that  wins  in  busi- 
ness is  aggressive  intelligence  and  not  negative  ineffect- 
ualness,  for,  given  ability,  a  man  will  succeed  in  spite  of 
other  drawbacks  that  may  at  first  seem  serious.  We  do 
not  admire  the  man  who  has  money  simply  because  he 
has  the  money;  we  admire  him  because  he  was  able  to 
make  it.     We  applaud  the  process  and  not  the  results. 

Why  is  the  Pennsylvania  the  premier  railroad  of  the 
world?  Because  the  men  operating  it  know  how.     WTiy 


THE  SCIENCE  OF  CREDIT  131 

did  Sears,  Roebuck  &  Co.  do  a  two  hundred  million 
dollar  business  in  1919?  Not  because  they  sold  better 
goods  or  at  lesser  prices  than  their  competitors,  but — 
they  know  how  to  sell  goods.  Why  did  the  great  Penn- 
sylvania Hotel  in  New  York  barely  open  its  doors 
before  it  was  full?  Because  the  Statlers  know  how  to 
to  run  a  hotel.  The  world  knows  they  do.  The  know 
how — that's  the  crucial  point  in  all  successful  business. 

Why  Men  Fail. 
In  reviewing  the  failures  for  1918  Bradstreet's  Journal 

says : 

"Business  success  or  failure  is  largely  personal — in  other  words, 
that  the  individual  himself  is  largely  responsible  for  failure  to  succeed 
in  business — there  has  been  no  higher  percentage  of  personal  liability 
established  than  in  the  year  recently  closed.  In  that  year  86  per 
cent,  of  the  failures  were  classed  as  due  to  the  individual,  and  only 
14  per  cent,  were  charged  to  extraneous  causes.  In  1917  85  per  cent, 
of  all  failures  were  charged  to  the  individual  and  only  15  per  cent,  to 
outside  causes;  in  1916  the  proportions  were  81.5  per  cent,  personal 
and  18.5  per  cent,  non-personal,  and  in  1915  the  proportions  were  74.4 
and  25.6  per  cent.,  respectively.  Never  before  1917  in  the  quarter 
century  of  Bradstreet's  experience  in  this  sort  of  statistical  work  was 
the  percentage  due  to  the  individual  himself  as  high  as  85  per  cent., 
the  nearest  approach  to  this  being  82  per  cent,  reached  in  1910  and 
82.3  per  cent,  reached  in  1890.  To  fully  understand  the  above 
statements,  it  will  be  advisable  to  examine  Bradstreet's  groupings  of 
the  causes  of  failure  proceeding  from  or  inherent  in  the  individual  as 
compared  with  those  outside  of  his  control. 

A. — Due  to  faults  of  those  failing: 

Incompetence  (irrespective  of  other  causes). 
Inexperience  (without  other  incompetence). 
Lack  of  capital. 
Unwise  credits. 

Speculation  (outside  regular  business). 
Neglect  of  business  (due  to  doubtful  habits). 
Personal  extravagance. 
Fraudulent  disposition  of  projM'i  ty. 


132  THE  BUSINESS  MAN  AND  HIS  BANK 

B. — Not  due  to  faults  of  those  failing: 

Specific  conditions  (disaster,  war,  floods,  etc). 

Failures  of  others  (of  apparently  solvent  debtors). 

Competition. 

" Bradstreet' s  definition  of  a  business  failure  is  that  it  "must  involve 
some  loss  to  creditors  of  individuals,  firms,  or  corporations  engaged  in 
ordinary  commercial  operations."  Under  this  classification,  failures 
of  professional  men,  such  as  physicians,  lawyers,  and  actors,  as  well 
as  stockbrokers  and  real-estate  dealers,  also  old  bankruptcies  passing 
through  the  United  States  courts,  have  no  place,  since  these  generally 
are  dissociated  from  the  recognized  commercial  life  of  the  country. 
Failures  to  succeed,  without  loss  to  creditors,  are,  therefore  not 
embraced  in  the  data.  Bradstreet' s  statistics  do,  however  include 
"all  suspensions  of  banks  and  other  strictly  financial  institutions, 
even  if  these  suspensions  prove  only  temporary."  From  1890  until 
1912  lack  of  capital  was  the  leading  cause  of  failure.  In  1912  incom- 
petence forged  to  the  front  and  altho  passed  in  turn  by  lack  of  capital 
in  1913  and  1914,  incompetence  in  1915  again  took  and  has  since  held 
first  place,  with  36.5  per  cent,  of  all  failures  credited  to  it  in  1918,  as 
against  33.2  per  cent,  due  to  lack  of  capital.  These  two  causes, 
with  the  addition  of  inexperience,  which  is  another  form  of  incompe- 
tence in  1918  accounted  for  76.4  per  cent,  of  all  failures,  as  against 
74.2  per  cent,  in  1917,  69.5  per  cent,  in  1916,  and  62.8  per  cent,  in 
1915.  Speculation  as  a  cause  of  failure  has  been  at  a  low  ebb  for 
four  years,  and  the  same  is  true  of  unwise  credits,  neglect,  and  ex- 
travagance. All  of  these  personal  causes  combined  totaled  86  per 
cent,  of  the  failures. 

"While  86  per  cent,  of  all  failures  were  chargeable  to  personal 
causes,  only  76.1  per  cent,  of  liabilities  were  so  credited  in  1918,  as 
against  77.8  per  cent,  in  1917,  and  73.6  per  cent,  in  1916.  Lack  of 
capital  was  the  most  prolific  source  of  liabilities  the  proportion  in  1918 
being  30.8  per  cent.,  as  against  32.7  per  cent,  in  1917  and  31.9  per 
cent,  in  1916.  The  1917  proportion,  it  might  be  noted,  was  one  of  the 
largest  in  years.  Next  in  importance  to  lack  of  capital  was  incompe- 
tence, 26.9  per  cent.,  which  compared  with  25.3  per  cent,  in  1917  and 
21.8  per  cent,  in  1916.  Fraud,  the  third  most  important  personal 
cause,  accounted  for  9.2  per  cent,  in  1918,  9.9  per  cent,  in  1917,  and 
7.4  per  cent,  in  1916.  Inexperience,  another  form  of  incompetence, 
accounted  for  4.7  per  cent,  in  1918,  5.2  per  cent,  in  1917,  and  4.4  per 
cent,  in  1916.  The  two  causes  of  incompetence  and  inexperience 
combined  accounted  for  31.6  per  cent,  of  all  liabilities  in   1918, 


THE  SCIENCE  OF  CREDIT  133 

against  30.5  per  cent,  in  1917.  The  other  personal  causes  not  above 
mentioned,  unwise  credits,  speculation,  neglect,  and  extravagance 
accounted  for  only  4.5  per  cent,  of  all  liabilities  in  1918  and  4.7 
per  cent,  in  1917.  Of  the  non-personal  causes  of  liabilities,  specific 
conditions  were  the  most  hurtful,  producing  19.8  per  cent,  in  1918, 
as  against  only  14.2  per  cent,  in  1917,  but  19.3  per  cent,  in  1916. 
Failures  of  others  and  competition  accounted  for  only  4.1  per  cent, 
of  the"  1918  liabilities,  against  8  per  cent,  in  1917.  As  regards  compe- 
tition, the  proportion  of  failures  and  liabilities  due  thereto  were  not 
materially  different,  being  respectively  1.2  and  eight-tenths  of  1  per 
cent. 

"  Nineteen-eighteen  was  apparently  the  best  year  in  nearly  two 
decades  for  the  man  with  small  capital.  Of  10,146  failing  in  the 
United  States  and  Canada  in  that  year  9,078,  or  89.5  per  cent.,  had 
not  to  exceed  $5,000,  and  a  large  number  of  these  undoubtedly  had 
less  than  this  old-time  minimum  requirement.  Not  since  1897  was 
there  a  smaller  percentage  so  provided,  the  proportion  in  1917  being 
94.1  per  cent.,  in  1916,  95  per  cent.,  and  in  1915,  93.5  per  cent.  The 
1916  percentage,  it  might  be  noted,  was  the  highest  thus  far  recorded. 
Traders  in  the  next  higher  classification,  over  $5,000  and  less  than 
$20,000,  however,  suffered  more  than  in  any  year  back  to  1897,  the 
proportion  in  1918  being  7.4  per  cent.,  against  only  4.3  per  cent,  in 
1917,  3.9  per  cent,  in  1916,  and  4.8  per  cent,  in  1915.  Those  with 
$20,000  but  less  than  $50,000  failing  constituted  2.2  per  cent,  of  the 
1918  failures,  and  those  in  still  higher  classes  combined  were  less  than 
1  per  cent,  of  all  failing.  Of  the  liabilities  of  the  10,146  persons  or 
corporations  failing  in  1918,  it  may  be  said  that  59.1  per  cent,  owed 
less  than  $5,000,  as  against  a  proportion  of  79.7  per  cent,  in  1917,  a 
fact  speaking  volumes  for  the  credit  curtailment  said  to  have  been 
enforced  in  that  year.  Those  with  $5,000  or  over,  however,  were  a 
vastly  larger  proportion  than  in  1917,  which  may  be  construed  as  indi- 
cating that  credit  curtailment  was  operative  most  heavily  against 
the  small  trader.  As  to  credit  ratings  of  those  failing,  it  might  be 
noted  that  96.8  per  cent,  had  very  moderate  or  no  credit,  which 
differs  little  from  the  proportions  ruling  in  recent  previous  years. 
The  1916  proportion,  97.7  per  cent.,  was  the  highest  recorded.  The 
constancy  of  these  precentages  as  to  credit  ratings  over  the  past 
four  years,  in  the  face  of  heavily  reduced  numbers  failing,  is  not  the 
least  interesting  feature  of  this  exhibit." 

It  is  not  difficult  to  tell  whether  or  not  a  business  man 
has  this  ''know  how."     A  visit  to  his  store  is  enough. 


134  THE  BUSINESS  MAN  AND  HIS  BANK 

The  poor  farmer  may  be  known  merely  by  looking  at  his 
barns,  the  poor  business  man  by  his  windows,  his  stock, 
his  fixtures,  his  delivery,  and  his  advertising. 

Of  the  three  fundamentals  of  credit  I  would  give 
first  place  to  ability,  assuming  that  it  carries  with  it 
integrity.  Some  men  were  never  fitted  by  nature  or 
training  to  be  the  heads  of  business,  because  natural 
ability  is  lacking;  and  the  natural  lack  has  not,  and  in 
many  cases  cannot,  be  acquired.  The  human  machine 
is  faulty.  Place  a  fortune  in  the  hands  of  some  men 
and  let  them  go  into  business  and  failure  ensues.  Give 
an  able  man  a  chance  and  he  will  make  a  fortune. 
If  the  careers  of  great  men  attest  one  truth,  it  is  not 
the  threadbare  axiom  that  "honesty  is  the  best  policy" — 
(it  is  the  only  policy) — but  that  ability  wins  against  the 
world.  In  formulating  a  recipe  for  success,  I  would 
begin  with  "brains — plus."  Neither  money  nor  honesty 
can  make  up  for  the  lack  of  this  essential  thing. 

The  Property  Risk. 

The  last  element  in  business  success  is  that  of  capital. 
The  honest  man  plus  the  able  man,  is  bound  to  develop 
into  the  successful  man,  and  his  success  is  measured 
by  the  increase  in  his  worldly  goods.  The  result  of 
business  is  the  net  profit.  Net  profit  means  wealth, 
and  wealth  means  power.  The  most  foolish  thing  a 
business  man  can  do  is  to  refuse  to  show  himself  to  the 
banker.  If  the  banker  asks,  as  he  undoubtedly  will, 
for  a  statement  of  the  business,  it  should  be  fully  and 
willingly  given;  first,  because  it  affords  a  correct  basis 
upon  which  to  work,  and  second  because  it  is  but  fair 
that  the  banker  should  know.  The  man  who  says:  "I 
never  give  a  statement  because  I  never  borrow,  may 
sometime  need  to  borrow  and  find  he  has  no  credit. 
There  is  but  one  royal  road  to  credit  and  that  is  to 


THE  SCIENCE  OF  CREDIT  135 

borrow  and  pay  as  agreed;  to  buy  on  time  and  pay  on 
time;  to  promise  and  fulfill;  to  shoulder  debt  and  pay 
it  off. 

This  property  risk  determines  the  probability  of  the 
debt  being  paid  and  the  statement  that  leads  up  to  it  is 
the  statistical  evidence.  It  is  obvious  that  if  a  borrower 
has  two  dollars  of  assets  for  every  dollar  of  debt,  the 
chances  of  meeting  his  obligations  are  in  his  favor; 
for  the  assets  must  realize  less  than  fifty  cents  on  the 
dollar  before  the  creditors'  interests  are  jeopardized. 
And  if  the  debtor  should  repudiate  his  debts,  they  must 
be  collected  out  of  his  property.  In  short,  if  he  'will 
not  pay,  he  can  be  compelled  to  pay. 

Of  course,  much  depends  upon  the  character  of  the 
property  which  is  back  of  the  debt.  If,  for  instance, 
the  debtor  owes  a  thousand  dollars  and  has  Liberty 
Bonds,  or  a  quantity  of  meat,  or  lumber,  or  anything 
that  is  quickly  salable,  the  property  risk  is  good:  but 
if  he  owns  a  plot  of  land  ten  miles  from  a  railroad,  which 
could  hardly  be  given  away,  the  property  risk  is  poor. 
It  depends,  not  so  much  upon  the  amount  of  property, 
although  that  is  important,  as  upon  the  character.  And 
the  increase  in  property  worth  is  the  best  evidence  that 
the  other  two  factors  are  existent,  for  property  is  the 
result  of  ability  and  integrity  rightly  applied. 

The  Bank  Account  as  an  Indicator  of  Credit. 

The  business  man  writes  large  the  story  of  his  business 
in  his  bank  account.  A  prosperous  business  is  reflected 
in  the  bank  balance  and  a  decaying  business  is  mirrored 
in  the  lack  of  it.  Here  for  instance  is  the  account  of  a 
hotel.  It  is  doing  a  large  business.  The  balance  is 
always  around  $10,000.  No  check  ever  goes  back  for 
lack  of  funds.  The  proprietor  takes  on  another  place. 
The  banker  knows  nothing  of  the  terms  or  the  possi- 


136  THE  BUSINESS  MAN  AND  HIS  BANK 

bilities.  It  may  be  he  has  a  loan  running  to  the  parent 
hotel  that  he  considers  safe.  Soon  he  notices  that  the 
balances  are  running  down.  Checks  are  returned  short. 
Overdrafts  creep  in.  The  season  comes  and  goes  and 
the  old  balance  never  comes  back.  Instinctively  he 
knows  that  the  venture  has  proven  unprofitable.  The 
gamble  has  lost. 

There  is  absolutely  nothing  that  commends  itself  to 
the  banker's  credit  sense  so  quickly  and  so  favorably 
as  an  ample  balance — working  capital.  It  indicates 
first  of  all  that  the  business  man  has  a  surplus.  He 
has  money  in  reserve.  He  can  buy  goods  and  pay  for 
them.  He  can  take  advantage  of  cash  payments.  He 
need  not  worry  about  the  coming  of  Saturday  for 
Saturday  will  find  his  balance  large  enough  to  meet  his 
pay  roU.  He  is  not  on  the  danger  line  all  the  time  and 
can  spend  his  energies  in  constructive  work  and  not 
destructive  worry.  Again,  it  indicates  that  he  has  made 
money,  for  if  he  has  not  he  would  not  have  a  reserve. 
And  finally  it  indicates  that  he  has  quick  assets,  and 
these  are  the  backbone  of  all  business. 

There  was  a  time  not  so  far  distant  when  the  granting 
of  a  loan  on  the  part  of  the  banker  was  done  through  a 
crude  and  unscientific  method  that  resolved  itself  into 
a  mere  knowledge  of  the  man  as  a  neighbor  or  a  local 
townsman.  The  use  of  the  credit  statement  was  not 
common  twenty-five  years  ago,  and  only  as  banks  began 
to  branch  out  and  lend  their  money  over  a  wider  terri- 
tory has  the  use  of  the  statement  become  necessary  as  a 
factor  in  the  extension  of  credit.  The  principles  of 
credit  are  now  so  firmly  established  and  the  practice 
of  banks  and  bankers  so  uniform  that  the  banker  of 
New  York  would  be  at  home  in  a  bank  in  California  or 
Texas,  and  would  use  the  same  identical  processes  to 
satisfy  himself  as  to  the  worth  of  the  credit  seeker. 


THE  SCIENCE  OF  CREDIT  137 

The  Statement. 

The  basis  of  all  credit  operations,  whether  a  bond 
issue,  a  flotation  of  commercial  paper,  or  a  single  loan, 
is  the  statement  of  condition.  This  statement  is  valu- 
able for  two  reasons.  First,  it  gives  the  lender  definite 
information  upon  which  to  work,  by  setting  forth  in 
detail  the  financial  condition  of  the  borrower.  The  fact 
that  a  business  is  rated  at  a  million  is  very  good,  but 
unless  the  foundation  for  this  rating  is  known,  we  have 
merely  some  one's  say  so  that  the  firm  is  worth  as  stated. 
After  the  analysis  of  a  credit  statement  is  understood, 
most  of  the  basic  facts  of  the  business  may  be  known, 
and  doubtful  points  cleared  up.  The  ability  to  do  this 
analyzing  is  not  difficult  to  acquire.  Second,  the  making 
of  false  statements  to  obtain  credit  is  now  a  serious 
offence  in  the  eyes  of  the  law  and  one  making  such  a 
statement  is  guilty  of  a  felony.  And  because  of  the 
latter  fact  we  may  assume  the  statement  to  be  honest; 
for  if  otherwise  we  are  dealing  in  the  dark  with  a  criminal. 

Refusal  to  make  a  Statement. 

To  refuse  a  statement  is  to  open  the  door  to  suspicion. 
If  you  are  good  for  your  obligations  why  hesitate  to  show 
yourself  to  be  so?  If  you  are  worth  as  you  claim — 
$10,000,  why  fear  to  show  of  what  it  consists?  This 
point  is  well  illustrated  by  the  following  incident:  A 
certain  business  man  desired  a  loan  of  $5,000  based  upon 
bankers'  contracts,  a  perfectly  good  security.  The  loan 
was  granted  and  the  security  about  to  be  handed  over 
when  the  banker  asked  the  would-be  borrower  about 
his  company,  who  constituted  it  and  a  statement  of 
its  affairs.  It  then  developed  that  there  was  no  corpo- 
ration as  claimed,  but  a  single  ownership,  and  the  men 
posing  as  the  heads  were  dummies  only.  The  banker 
then  asked  the  individual  for  his  statement,  and  it  was 


138  THE  BUSINESS  MAN  AND  HIS  BANK 

refused  on  the  ground  that  he  had  never  given  one  and 
never  would,  and  ''could  get  his  money  elsewhere;" 
and  he  did.  The  lending  bank  lost.  Now  what  was 
the  mental  conclusion  of  the  banker  when  the  borrower 
refused  his  statement?  That  the  individual  was  ''too 
proud  to  show  his  statement, "  or  had  a  poor  statement? 
A  man  of  means  or  a  big  bluff? — A  straightforward 
individual  or  a  tricky  fellow  ?^ — An  honest  man  or  one 
who  would  bear  watching?  What  would  you  have  done 
under  the  circumstances? 

The  refusal  to  make  a  statement  does  not  redound 
to  the  credit  of  the  one  so  refusing.  It  may  be  true 
that  no  credit  is  asked;  but  banks  are  repeatedly  asked 
for  information  concerning  business  houses,  and  even 
though  cash  is  paid  for  all  purchases,  the  credit  standing 
of  the  concern  is  often  required  even  though  it  be  a 
cash  transaction.  The  banker  can  act  much  more 
intelligently  if  he  knows  the  facts.  Even  though  all 
his  casual  information  is  favorable,  to  fortify  it  with 
facts  and  figures  lends  much  to  the  dignity  of  the  reply. 
The  fact  that  the  great  reporting  agencies  do  not  list 
the  name  is  no  credit  to  the  one  so  omitted;  it  rather 
opens  the  question  box. 

If  a  bank  were  to  take  the  position  that  it  asked  no  one 
to  trust  it;  that  it  did  not  borrow;  that  it  was  an  inde- 
pendent concern  caring  httle  or  nothing  about  the 
opinion  of  the  public,  it  would  soon  feel  the  blight  of 
criticism  and  decay.  But  reversely,  it  shows  its  hand; 
it  lays  its  cards  on  the  table,  and  is  willing  to  have  the 
pubhc  know  where  it  stands.  The  same  is  true  with 
regard  to  the  business  man  who  is  wilhng  to  open  his 
books  and  have  his  condition  known;  for  only  as  it  is 
known  can  he  be  assured  of  the  support  and  confidence 
of  the  banker;  which  support  and  confidence  he  will 
sooner  or  later  need. 


THE  SCIENCE  OF  CREDIT  139 

The  Statement  Should  be  Complete. 

The  statement  should  be  complete  and  should  rep- 
resent the  signer's  whole  estate,  even  though  the  accom- 
modation asked  for  be  so  small  that  it  would  be  amply 
fortified  by  only  a  portion  of  the  borrower's  entire  net 
worth.  The  reason  for  this  is  that  such  a  statement 
is  apt  to  mislead  the  bank  officials  as  to  the  true  status 
of  the  borrower,  and  at  some  future  time  operate  to 
his  disadvantage.  This  point  can  be  more  clearly 
seen  by  an  actual  example:  A  certain  business  man  de- 
sired a  loan  of  $500,  He  made  a  statement  showing  a 
net  worth  of  $10,000  all  in  real  estate.  The  loan  was 
granted  and  paid  off  in  due  course.  Two  years  later  he 
desired  a  loan  of  $1,500,  and  in  the  course  of  the  nego- 
tiations it  developed  that  he  had  previously  set  down 
only  his  local  property,  whereas  he  had  a  substantial 
holding  in  a  manufacturing  concern,  owned  a  business 
property  in  a  neighboring  city,  and  over  a  thousand 
dollars  worth  of  Liberty  Bonds.  His  net  worth  was 
more  than  double  the  original  showing,  and  the  bank 
men  had  been  giving  him  a  rating  off  less  than  half  the 
amount  he  was  really  entitled  to.  His  argument  was 
that  he  set  down  enough  to  secure  a  small  loan  and 
thought  that  sufficient;  but  the  result  was  that  he 
hurt  himself  in  the  minds  of  at  least  five  bank  officials. 
He  was  unfair  to  himself  and  the  bank  was  unfair  to 
him,  but  solely  through  his  own  fault. 


CHAPTER  XVIII 
HOW  TO  PREPARE  A  STATEMENT 

It  has  come  to  be  a  common  custom  among  large  and 
small  concerns  to  have  a  periodical  audit  made  by  a 
competent  accountant.  The  reasons  are  two:  first 
the  safeguard  that  attends  an  independent  checking  of 
the  books,  and  second,  the  weight  that  such  an  audit 
carries  in  banking  and  business  circles.  It  is  apparent 
that  if  the  audit  is  made  by  the  bookkeeper  himself, 
it  must  of  necessity  be  a  biased  audit;  and  if  the  owner 
appraises  his  own  property  it  must  likewise  be  a  biased 
appraisal.  Therefore  at  stated  times  firms  of  chartered 
accountants  audit  the  books  of  all  well  managed  con- 
cerns and  submit  their  findings  to  the  owners  and  they 
to  the  banks.  It  would  be  called  in  accounting  circles 
an  audit  and  an  examination  with  the  results  submitted 
in  the  form  of  a  balance  sheet  and  a  report. 

In  reviewing  this  balance  sheet  the  banker  is  chiefly 
concerned  about  the  following  matters,  not  necessarily 
however  in  the  order  herein  set  forth.  First,  the  ratio 
of  quick  assets  to  quick  liabilities.  The  quick  assets 
consist  of  cash,  accounts  receivable,  notes  receivable, 
merchandise  and  investments.  The  quick  liabilities  are 
notes  payable;  accounts  payable.  All  other  assets  are 
fixed  or  slow,  and  likewise  are  all  other  liabiUties.  Out 
of  the  quick  assets  the  current  liabilities  must  be  met, 
and  the  solvency  of  the  concern  depends  upon  the 
Uquidity  and  the  ratio  of  these  items.  There  are  com- 
ing due  daily  the  invoices  for  the  stock  and  promissory 
notes  outstanding  having  short  maturity.     Out  of  the 

140 


HOW  TO  PREPARE  A  STATEMENT  141 

inflow  of  money  that  follows  the  payment  of  accounts 
and  bills  receivable,  these  charges  must  be  met.  If  the 
ledger  accounts  are  slow  and  represent  ill  advised  credit, 
and  the  sales  of  merchandise  are  slow  by  reason  of 
poorly  chosen  stocks  or  unseasonable  weather,  the 
maturing  invoices  cannot  be  met,  for  these  do  not  depend 
upon  the  weather  but  are  as  sure  as  death  and  taxes. 

The  banker  looks  upon  the  business  in  its  liquidating 
possibilities  and  attempts  to  measure  the  success  of 
liquidation  from  the  quality  of  the  statement.  If  the 
borrower  has  two  dollars  of  quick  assets  that  are  not 
only  quick,  but  good,  he  feels  assured  of  the  payment  of 
the  current  liabilities,  even  though  the  quick  assets 
shrink  one-half  in  liquidation.  Much  depends,  of  course, 
upon  the  character  of  the  business  as  well  as  the  charac- 
ter of  the  credits.  Staple  lines  such  as  groceries  and 
meats  will  liquidate  much  nearer  par  than  seasonable 
and  specialty  goods.  Whereas  a  margin  of  one  and 
one-half  to  one  might  be  ample  in  meats,  in  fancy 
dresses  and  millinery  three  to  one  would  be  much  safer. 

Cash. 

Cash  should  of  course  be  what  it  purports  to  be — cash 
on  hand  and  in  banks,  and  nothing  else, — no  ''I.  O.  U's" 
or  debit  tickets  from  members  of  the  firm  or  office  force. 
This  is  the  easiest  of  all  the  assets  to  actually  verify. 
A  count  of  the  cash  on  hand  and  verification  of  the  bank 
balances  is  sufficient. 

Accounts  Receivable. 

Accounts  receivable  represent  goods  gone  out  of 
stock,  merchandise  taken  from  the  shelves  and  put  on 
the  books;  and  since  it  was  good  merchandise,  paid  for 
in  good  money,  the  accounts  must  also  be  good,  else 
the  seller  has  given  away  his  money.  These  accounts 
should  not  be  of  long  standing,  and  their  quality  can 


142  THE  BUSINESS  MAN  AND  HIS  BANK 

easily  be  determined  by  a  perusal  of  the  books.  They 
will  divide  themselves  into:  accounts  not  yet  due; 
accounts  due  and  unpaid;  accounts  past  due;  slow  ac- 
counts, and  doubtful  accounts.  In  setting  up  the 
statement  the  total  accounts  are  usually  listed  and 
provision  made  for  the  slow  and  doubtful  ones,  thus 
showing  as  an  asset  only  those  considered  by  the  auditor 
as  good. 

Merchandise. 

The  merchandise  item  is  the  most  difficult  of  all  to 
appraise,  either  by  the  owner  or  the  accountant.  It 
means  the  handling  of  every  article  and  a  listing  of  its 
price  and  quantity;  the  measuring  of  every  piece  of 
goods  and  all  the  mental  and  physical  labor  that  attends 
the  handhng  of  goods  out  of  bulk.  Take  for  instance 
the  inventory  of  a  large  department  store.  It  must 
be  done  in  a  reasonably  short  time.  Sales  must  go  on 
daily  and  the  goods  handled  many  times  between  the 
count  and  the  proof.  Measuring  is  usually  done  by 
the  clerks  as  time  affords  and  the  quantity  marked  on  a 
ticket.  As  goods  are  sold,  the  mark  is  reduced  until 
the  final  clean  up,  when  all  hands  work  overtime  record- 
ing the  quantity  and  the  inventory  price.  Again,  the 
listing  of  the  many  thousands  of  articles  in  a  large 
hardware  store,  drug  house,  grocery,  etc.,  can  readily 
be  seen  to  be  a  vast  labor  consumer  and  endlessly  tire- 
some work.  And  yet,  there  is  no  other  way  to  get  a 
true  account  of  stock.  There  are  concerns  that  keep  a 
running  inventory.  This  is  done  by  getting  a  correct 
starting  point  and  adding  to  and  taking  from  the  mer- 
chandise item  the  purchases  and  sales;  but  this  will  not 
verify  losses  from  theft,  nor  errors  in  the  bookkeeping 
work,  and  must  be  supplemented  by  the  periodic  test 
of  actual  inventory. 


HOW  TO  PREPARE  A  STATEMENT  143 

Inasmuch  as  inventory  is  the  most  difficult  asset  to 
check,  it  should  be  given  the  most  care.  The  banker 
will  pay  more  attention  to  inventory  than  to  any  other 
feature  of  the  statement.  Under  the  income  tax  pro- 
visions inventory  plays  an  important  part  in  the  esti- 
mate of  the  tax,  and  inasmuch  as  it  is  one  of  the  most 
vital  elements  in  the  statement  it  should  have  proper 
attention. 

The  true  basis  for  inventory  is  a  matter  of  opinion. 
There  are  many  ideas  on  the  subject.  The  fairest 
would  seem  to  be:  cost  if  the  market  value  is  higher 
than  the  cost,  and  market  if  the  cost  is  above  the  market. 

A  well  known  firm  of  accountants  has  laid  down  the 
rule  that  inventory  should  be  taken  at  a  figure  that 
will  give  the  usual  margin  of  profit  irrespective  of  other 
factors.  For  instance  the  mark  up  of  the  firm  is  one- 
half.  Therefore  an  article  must  bring  one-half  more  than 
its  cost  to  realize  the  margin  of  profit,  and  a  dollar  article 
(cost)  must  sell  at  $1.50  to  realize  a  profit  of  one-half 
the  cost.  Here  for  instance  is  an  article  that  will 
bring  $1  and  cost  80  cents.  What  shall  be  the  in- 
ventory price?  If  we  get  our  margin  of  profit  above  the 
inventory  it  must  be  listed  at  66  cents,  allowing  a  mark 
up  of  one-half.  This  would  seem  to  be  practical  and 
fair. 

Bills  Receivable. 

While  bills  receivable  are  regarded  as  a  quick  asset, 
they  are  found  in  but  few  of  the  credit  statements,  busi- 
ness now  being  carried  on  through  the  accounts  receiv- 
able. They  may  still  be  found  in  a  few  lines,  and  it  is 
well  to  state  for  what  reason  they  have  been  taken  and 
whether  or  not  they  are  collectable.  They  often  repre- 
sent slow  accounts,  settled  by  notes.  Sometimes  they 
are  for  money  loaned  to  the  members  of  the  firm  or  em- 


144  THE  BUSINESS  MAN  AND  HIS  BANK 

ployees.  If  so  they  are  not  a  desirable  addition  to  the 
statement.  Where  the  custom  of  settling  by  note  ob- 
tains, it  should  be  so  stated,  so  that  the  reason  for  this 
item  will  be  apparent. 

As  the  acceptance  method  of  selling  grows  in  favor, 
acceptances  will  form  a  chief  asset,  and  will  materially 
strengthen  any  statement,  inasmuch  as  this  method  is 
now  looked  upon  with  great  favor  by  banks  and  business 
houses,  chambers  of  commerce  and  credit  associations. 

Fixed  Assets. 

The  foregoing  assets  may  be  said  to  be  primary, 
and  all  others  are  secondary,  however  good  they  may 
be.  Out  of  the  quick  assets  the  quick  liabilities  must 
be  met,  leaving  it  to  the  slow  or  fixed  assets  to  add 
backbone  to  the  business. 

The  fixed  assets  usually  consist  of  the  following  items: 

1.  Land  and  huildings.  These  are  regarded  as  the 
last  to  be  realized  upon  in  case  of  failure.  The  build- 
ings usually  have  a  special  utility,  ofttimes  a  limited 
usefulness  and  in  an  ordinary  real  estate  market  would 
move  slowly.  Manufacturing  concerns  of  course  must 
have  such  investments,  but  the  less  the  holding  price 
the  better  the  banker  is  pleased.  The  favored  custom 
is  to  show  the  buildings  at  cost  less  depreciation,  some- 
times attended  by  an  independent  appraisal. 

2.  Machinery.  This  is  often  a  large  item,  and  a  neces- 
sary one;  but  inasmuch  as  it  is  specially  adapted  to  the 
business,  it  would  be  worth  onl}^  its  scrap  value  in  any 
other  line.  Like  real  estate  it  should  be  stated  at  its 
cost  less  depreciation,  making  the  latter  figure  liberal. 
The  upkeep  of  the  machines  should  be  charged  to  ex- 
pense and  not  added  to  their  cost. 

3.  Stocks  and  bonds  (often  in  subsidiary  companies). 
These  should  be  stated  in  detail  and  not  grouped;  for 


HOW  TO  PREPARE  A  STATEMENT  145 

some  may  be  worthless  and  only  an  inspection  of  each 
item  will  determine  its  value  in  the  statement. 

4.  Delivery  equipment.  This  consists  of  horses  and 
wagons,  automobiles  and  trucks.  Like  machinery  they 
wear  out  and  should  be  Uberally  treated  as  to  depreciation. 

5.  Patents,  trade  marks,  etc.  These  are  often  costly 
and  valuable,  and  their  worth  to  the  concern  can  only 
be  known  by  a  valuation  of  the  business  in  the  Hght 
of  these  facts.  A  basic  patent  on  an  article  may  be  the 
keystone  of  a  huge  business,  and  a  trade  mark  may  be 
the  greatest  asset  of  a  concern,  for  upon  it  the  sales 
depend,  and  upon  the  sales  depends  the  business. 

6.  Good  will.  This  is  often  an  illusive  term,  and 
often  a  most  valuable  asset.  It  is  best  defined  as  ''the 
tendency  of  trade  to  follow  an  established  course." 
Trade  follows  trademarks.  The  public  cares  httle  who 
makes  Uneeda  Biscuits  as  long  as  they  are  good  bis- 
cuits and  come  in  the  familiar  package.  Nor  would  the 
sales  of  Ford  cars  diminish  whoever  might  be  the  head 
of  the  firm  or  the  sales  manager.  It  is  the  Ford  name 
and  quahty  that  sells  the  cars.  Here  trademarks  and 
patents  are  priceless,  and  the  good  will  that  follows  the 
name  is  likewise  invaluable;  but  a  million  may  have 
been  spent  upon  a  patent  that  never  proved  a  financial 
success  and  in  such  a  case  it  would  add  nothing  to  the 
worth  of  the  statement. 

Good  will  is  often  the  amount  the  concern  can  safely 
pay  dividends  on.  To  say  that  the  bread  trade  worked 
up  by  a  large  bakery  in  New  York  is  worth  five  millions 
is  to  guess  in  the  dark;  but  to  say  that  the  firm  has  made 
profits  enough  in  the  past  five  years  to  pay  six  per  cent 
on  five  millions  of  good  will  is  to  state  a  fact  that  is 
capitalized  every  day  in  business  reorganizations  and 
adjustments.  As  for  the  banker,  he  usually  disregards 
quite  largely  the  item  of  good  will  in  a  statement. 

10 


146  THE  BUSINESS  MAN  AND  HIS  BANK 

Quick  Liabilities. 

The  quick  liabilities  are  as  a  rule  of  two  kinds — notes 
payable,  and  accounts  payable.  The  accounts  payable 
are  the  book  accounts  for  goods  purchased.  They 
represent  merchandise  in  stock  and  not  yet  paid  for. 

They  should  not  be  in  a  larger  amount  than  is  war- 
ranted by  the  volume  of  business.  The  proper  amount 
of  accounts  receivable  and  accounts  payable  can  be 
estimated  from  the  volume  of  sales.  If,  for  instance, 
the  sales  are  $10,000  a  month,  and  the  credit  terms  are 
60  days,  the  firm  should  not  have  on  its  books  more  than 
three  months'  sales.  On  the  other  hand,  if  it  buys  at  the 
rate  of  $10,000  a  month  (cost  price  of  merchandise) 
it  should  not  have  unpaid  bills  of  more  than  a  current 
month;  for  it  should  take  the  cash  discounts,  even  though 
the  credit  term  be  longer.  And  if  the  unpaid  accounts 
are  equal  to  three  months'  purchases,  it  indicates  that 
it  is  not  taking  the  cash  discounts.  Inasmuch  as  well 
managed  concerns  take  advantage  of  the  cash  discounts 
there  should  be  in  this  item  only  those  accounts  that 
are  in  process  of  audit.  If  they  are  past  due,  it  indicates 
poor  management  and  poorer  business;  for  there  is  no 
better  way  to  make  quick  money  in  business  than  by 
paying  cash.  This  leads  us  to  a  brief  statement  of 
commercial  paper. 

Commercial  Paper. 

Bills  payable  represent  two  classes  of  loans:  loans 
from  the  home  bank  and  loans  by  outside  banks  that 
have  bought  the  promissory  notes  of  the  firm  through 
brokers.  The  process  of  issuing  commercial  paper  and 
its  purpose  may  be  seen  from  a  practical  illustration. 
The  True  Fit  Shoe  Company  has  orders  on  hand  for 
200,000  pairs  of  shoes  for  the  spring  trade.  It  needs 
leather,  and  can  buy  advantageously  for  cash.     It  needs 


HOW  TO  PREPARE  A  STATEMENT  147 

money  to  pay  its  hands.  To  finance  the  season's  out- 
put will  require  $100,000  in  addition  to  the  firm's  re- 
sources. It  will  have  an  audit  made  by  a  recognized 
firm  of  accountants,  giving  its  condition  as  of  a  stated 
date.  It  will  submit  this  statement  to  a  "Commercial 
Paper  Broker"  (there  are  probably  less  than  fifty  such 
firms  in  the  country  and  not  over  a  dozen  in  New  York) . 
The  broker  will  assure  himself  that  the  firm  is  in  good 
standing,  its  methods  and  management  clean  and  its 
history  honorable.  He  will  become  personally  ac- 
quainted with  the  members  and  if  satisfied  that  the 
risk  is  sound  will  ''take  on  the  name" — meaning,  will 
agree  to  sell  the  paper  of  the  firm  as  long  as  he  is  satisfied 
with  its  condition.  Twenty  notes  for  $5,000  each  are 
made  out,  payable  six  months  from  date,  usually  in 
New  York,  Boston  or  other  large  cities.  These  are  signed 
by  the  officers  authorized  to  sign  such  instruments. 
He  then  makes  a  transcript  of  the  statement  and  sells 
the  notes  to  banks  through  the  mail  and  by  salesmen. 
The  broker  will  either  sell  the  notes  and  remit  the  pro- 
ceeds, or  in  many  cases  he  is  strong  enough  and  has  such 
bank  connections  that  he  can  pay  for  them  on  dehvery. 
The  commission  is  usually  $12.50  on  $5,000,  and  the 
interest  rate  on  the  loans  depends  upon  the  state  of 
the  money  market,  running  from  3  to  six  per  cent. 

The  broker  does  not  guarantee  the  paper  or  even  in- 
dorse it;  but  he  does  warrant  that  the  paper  is  genuine, 
and  the  signatures  proper  to  bind  the  firm.  As  a  rule 
the  buying  banks  are  allowed  ten  days  within  which 
to  ''check"  the  paper,  which  means,  satisfy  themselves 
that  it  is  a  safe  risk.  This  is  done  by  writing  the  banks 
given  as  references  on  the  statement,  asking  their 
experience  with  this  firm's  paper. 

The  banks  used  as  references  are  usually  large  city 
banks  where  the  firm  keeps  account,  and  which  loan  the 


148  THE  BUSINESS  MAN  AND  HIS  BANK 

firm  on  its  direct  obligations,  and  are  acquainted  with  the 
personnel  of  the  business ;  also  the  home  banks  which  are 
of  course  most  familiar  with  the  condition  of  the  firm. 

Such  paper  is  bought  by  banks  in  huge  volume,  some 
firms  handling  more  than  two  milUon  dollars  a  week. 
Frequently  the  individual  members  of  the  firm  or 
company  indorse  the  paper  thus  lending  their  individual 
worth  to  that  of  the  concern  as  a  corporate  entity. 

From  the  proceeds  of  the  paper  the  shoe  concern  will 
pay  for  its  leather,  taking  advantage  of  the  cash  discounts, 
and  meet  its  pay  rolls.  As  the  shoes  are  sold  and  paid 
for  by  the  retailers  or  jobbers,  the  funds  will  be  in  hand 
to  meet  the  maturing  notes. 

The  record  of  commercial  paper  is  especially  clean.  It 
is  regarded  as  the  bank's  most  liquid  asset,  payment  rarely 
faihng.  Most  banks  are  buyers  of  such  instruments,  and 
many  prefer  it  to  any  other  form  of  investment. 

In  making  such  an  investment  the  banks  require: 
a  recent  statement,  preferably  audited ;  quick  assets  of 
at  least  two  to  one,  as  a  rule;  favorable  checking;  a 
statement  that  analyzes  well. 

The  statement  usually  gives  the  volume  of  sales,  and 
net  profits,  so  that  by  following  the  course  of  the  firm's 
business  from  year  to  year  the  banker  "has  a  very  good 
idea  of  its  progress. 

Knowing  the  sales,  he  can  judge  with  a  fair  degree  of 
accuracy  several  features  of  the  business.  Take  the 
turnover,  for  instance.  If  the  sales  are  $1,000,000, 
let  us  say  in  dry  goods,  with  a  mark  up  of  one-half,  the 
goods  that  have  gone  out  of  stock  have  cost  $666,000. 
If  the  inventory  shows  $300,000  of  goods  on  hand,  the 
turnover  has  been  twice.  In  other  words  the  goods  on 
hand  have  been  completely  sold  out  twice  during  the 
year.  With  gross  sales  of  $1,000,000  the  monthly 
average  is  $80,000.  If,  therefore,  the  accounts  receivable 
are  $400,000,   it  indicates  either  too  long  credit   (five 


HOW  TO  PREPARE  A  .STATEMENT  149 

months)  or  poor  collections;  for  if  the  firm  is  extending 
credit  wisely,  it  should  not  have  more  than  sixty  days 
sales  on  its  books.  Again  if  it  sells  at  the  rate  of  $80,000 
a  month  it  should  buy  at  the  rate  of  about  $50,000  to 
keep  the  stock  adequate;  and  it  should  not  have  unpaid 
accounts  (accounts  payable)  of  more  than  ten  days,  as- 
suming it  takes  its  cash  discounts,  as  it  should  if  it  bor- 
rows on  its  commercial  paper. 

The  Fixed  Liabilities. 

The  fixed  liabilities  consist  of  mortgages  upon  the 
property,  if  any,  and  bond  and  stock  issues  for  capitali- 
zation purposes.  The  maturities  of  the  mortgages  should 
be  given,  also  the  due  dates  of  the  bonds.  The  capital 
stock  is  usually  stated  as  "preferred"  and  ''common." 
In  addition,  many  firms  give  the  volume  of  sales,  profits, 
dividends,  and  reserves  for  taxes,  especially  the  income 
tax  which  is  now  an  important  charge  against  income. 

The  profit  and  loss  account  is  merely  a  bookkeeping 
term,  to  balance  the  statement.  Whether  it  represents 
real  profits  or  not  depends  upon  the  goodness  of  the 
assets  and  the  possibility  of  their  realizing  the  listed 
values.  If  for  instance,  we  were  to  increase  the  value 
of  the  merchandise  by  a  forced  inflation,  we  would  in- 
crease this  item.  It  moves  up  or  down  with  the  mark 
up  or  mark  down  of  any  asset,  and  personally,  I  have 
never  regarded  this  as  a  controlling  factor  in  judging 
statements.  The  fairness  of  the  appraisal  of  the  assets 
is  of  far  greater  importance. 

The  net  return  on  the  capital,  net  profits,  dividends, 
additions  to  surplus,  etc.,  may  all  be  determined  from 
the  statement,  if  properly  set  up,  and  the  banker  who 
knows  how,  can  discover  any  dangerous  element  of 
weakness  that  may  exist  in  the  management,  provided, 
of  course,  the  statement  is  honest  as  it  must  be,  if  the 
borrower  is  to  exist  long. 


CHAPTER  XIX 
BANK  LOANS 

All  that  has  been  said  in  tJie  foregoing  chapters  on 
credit  applies  to  the  credit  setting  of  a  loan,  and  is 
independent  of  the  practical  aspects,  which  are  purely 
mechanical.  While  no  two  men  would  use  the  same 
mental  processes  in  arriving  at  a  conclusion  regarding  a 
loan,  the  bookkeeping  is  more  or  less  the  same  in  all 
institutions.  While  in  one  bank  the  request  would  be 
passed  upon  directly  by  the  attending  officials,  in  others 
it  would  have  to  wait  the  meeting  of  a  committee;  but 
as  soon  as  the  note  is  accepted  and  passed  to  the  proper 
clerks  for  treatment,  the  methods  are  quite  standardized 
as  to  the  records  kept. 

The  usual  process  of  a  loan  is  as  follows.  The  request 
for  the  loan  is  made  to  the  proper  officer,  usually  the 
cashier.  The  statement  of  the  borrower  if  not  on  file 
is  furnished  and  the  purpose  of  the  loan  is  inquired  into. 
In  fact  it  is  quite  the  common  custom  for  borrowers  to 
state  the  reason  for  the  loan  as  a  matter  of  business. 
The  cashier  makes  his  memorandum,  either  in  the  offer- 
ing book  or  on  a  slip.  It  is  then  taken  up  in  committee, 
at  which  time  the  statement  will  be  reviewed,  together 
with  the  average  balance  of  the  borrower,  his  present 
line  of  discounts  and  whatever  other  information  may 
be  desired  in  passing  upon  the  request.  If  the  loan  is 
granted  the  note  is  executed  and  put  through  the  books. 

If  the  loan  is  in  the  form  of  a  "  receivable ' '  discounted — 
meaning  the  promissory  note  of  a  customer  of  the  bor- 
rower, information  may  be  desired  as  to  the  worth  of 

150 


BANK  LOANS  151 

the  maker  of  the  note.  This  is  the  case  where  the  one 
discounting  may  not  be  in  good  credit  and  the  strength 
of  the  paper  Hes  in  the  maker.  It  is  customary  to  give 
a  stated  Une  of  credit  to  the  borrower,  either  on  his  own 
name  or  on  his  receivables  or  both.  In  the  former 
case  he  can  put  in  his  note  at  any  time  within  the  Hmits 
and  have  immediate  credit.  In  the  case  of  receivables, 
he  is  privileged  to  put  in  paper  for  discount  within  the 
Umits;  but  as  a  matter  of  protection  both  to  him  and 
the  bank,  the  makers  of  the  paper  are  investigated 
before  making  the  discount.  For  instance,  a  lumber 
dealer  will  be  given  a  line  of  $10,000  on  his  receivables. 
He  may  send  in  his  paper  as  he  needs  funds  and  receive 
immediate  credit;  but  before  making  the  advances  the 
bank  will  check  up  the  firms  making  the  paper  and 
becoming  satisfied  as  to  their  credit  will  accept  such 
names  thereafter  without  the  credit  checking. 

Recording  the  Loans. 

The  bank  keeps  the  following  records  relating  to  loans : 

1.  Offering  book,  in  which  all  notes  offered  for  discount 
are  recorded.     The  committee  usually  signs  this  book. 

2.  Loan  register,  in  which  all  loans  actually  made  are 
recorded  as  they  are  put  through  the  books.  Each 
note  is  given  a  number  to  identify  it.  Some  banks  take 
a  full  description  of  the  paper  in  this  book.  3.  The 
maturity  book,  in  which  each  note  is  listed  as  to  its 
maturity.  The  bank  therefore  has  before  it  each  day 
the  notes  that  mature  as  of  that  day,  and  payments 
or  renewals  are  obtained  as  the  case  may  be.  It  is  the 
common  custom  to  send  out  notices  to  the  makers  of 
notes  a  week  or  ten  days  in  advance;  but  this  is  not 
obligatory.  It  is  however  valuable  in  that  it  keeps  the 
files  free  from  past  due  paper.  4.  The  hability  book 
in  which  the  total  amount  loaned  to  each  borrower  is 


152  THE  BUSINESS  MAN  AND  HIS  BANK 

recorded.  Both  the  direct  and  indirect  obhgations 
are  here  recorded  and  the  bank  can  at  any  time  know 
how  much  the  borrower  is  indebted  to  it.  5.  The 
average  balance.  This  records  the  average  balance  of 
the  borrower.  It  is  the  rule  to  require  the  borrower 
to  maintain  a  balance  proportionate  to  his  line  of  credit, 
usually  four  to  one;  that  is,  for  every  hundred  dollars 
of  loans  he  is  expected  to  maintain  a  balance  of  $25. 
The  reasons  for  this  are  twofold:  first  to  prevent  the 
borrower  working  on  too  small  a  bank  balance.  It 
keeps  him  in  funds,  whether  he  is  so  inclined  or  not. 
It  gives  him  a  working  fund.  And  second  it  gives  the 
bank  additional  profit,  for  while  it  charges  interest  on 
the  full  amount  it  advances  but  a  part.  If  the  line  of 
credit  is  large  and  the  balance  proportionate,  the  bank 
may  agree  to  pay  interest  at  a  nominal  rate  on  the  bal- 
ance, thus  equalizing  the  matter. 

With  the  above  information,  classified,  the  bank  has 
definite  and  complete  information  respecting  every 
note  that  passes  through.  It  is  often  of  great  value 
to  be  able  to  trace  such  transactions.  The  most  valu- 
able from  a  practical  standpoint  is  the  maturity  book, 
for  upon  it  depends  the  proper  presentation  of  the  notes 
for  payment — a  very  important  part  of  the  loaning 
process. 

Loans  and  Discounts  Distinguished. 

In  all  bank  statements  there  appears  the  item  ''Loans 
and  Discounts."  There  is  a  technical,  but  not  material, 
difference.  The  term  ''loan"  is  applied  to  advances  of 
money  on  promissory  notes,  usually  payable  on  demand 
and  "collateral  notes"  which  are  used  in  those  loans 
which  are  secured  by  pledge  of  stocks  and  bonds.  The 
interest  is  collected  when  the  loan  is  paid  or  at  stated 
times,   monthly  or  quarterly.     The  term   "discounts" 


BANK  LOANS  153 

is  applied  to  promissory  notes  made  by  the  borrower, 
or  promissory  notes  held  by  the  borrower  and  '^dis- 
counted" or  sold  to  the  bank,  which  are,  as  a  rule,  for 
a  definite  time,  the  interest  being  deducted  when  the 
loan  is  made. 

Promissory  notes  are  made  in  four  forms:  payable  at 
a  stated  time  after  date;  payable  a  certain  number  of 
days  after  date;  payable  a  certain  number  of  months 
after  date;  payable  on  demand.  It  is  important  that 
the  due  date  be  accurately  computed,  because  the  note 
must  be  presented  for  payment  when  it  is  due  — not 
before,  nor  after. 

Helpful  Rules  Regarding  Promissory  Notes. 

The  following  rules  regarding  notes  will  be  found 
useful.  They  are  embodied  in  the  Negotiable  Instru- 
ments Law,  the  basic  law  of  all  the  states  of  the  Union 
and  are  therefore  universal  in  their  application. 

1.  A  note  due  on  a  certain  date  is  due  on  that  date 
without  grace,  and  carries  interest  if  so  mentioned, 
from  its  date  to  the  date  named. 

2.  A  note  payable  a  certain  number  of  days  after 
date  is  due  on  the  last  day  of  the  time  mentioned  in  days. 

3.  A  note  due  a  certain  number  of  months  after  date 
is  due  on  the  same  day  of  the  month  indicated. 

4.  Unless  interest  is  mentioned  in  the  note,  it  carries 
no  interest  until  after  its  due  date,  and  then  draws 
interest  at  the  legal  rate  for  the  state  wherein  the  con- 
tract was  made. 

5.  Days  of  grace  no  longer  obtain. 

6.  The  words ' '  value  received ' '  are  no  longer  necessary. 

7.  Notes  due  on  Sunday  fall  due  on  Monday. 

8.  Notes  due  on  a  holiday  fall  due  the  next  business  day. 

9.  Notes  due  on  Saturday,  where  Saturday  is  a  half 
holiday,  are  due  on  Monday. 


154  THE  BUSINESS  MAN  AND  HIS  BANK 

10.  If  the  note  reads  ''with  interest"  the  interest  is 
added  to  the  face  amount  and  the  total  becomes  the  face 
of  the  note.  In  discounting  such  notes  banks  add  the 
interest  to  the  face  amount  and  discount  the  full  amount. 

11.  If  a  note  carries  interest,  and  is  discounted  after 
the  date,  the  interest  is  computed  for  the  full  time  and 
the  discount  is  figured  from  the  date  the  note  is 
discounted. 

12.  The  making  of  a  note  payable  at  a  bank  is  equiva- 
lent to  an  order  on  the  bank  to  pay  it  on  its  due  date. 
Banks  prefer  that  notes  should  be  payable  at  a  bank, 
for  it  gives  them  the  opportunity  to  check  the  paper 
through  the  bank  where  payable.  Inasmuch  as  the 
maker  generally  has  an  account  in  the  bank  where  the 
note  is  made  payable,  it  is  easy  to  get  an  opinion  as  to 
the  credit  risk,  and  banks  exchange  this  information 
freely.  It  also  makes  presentation  easy.  If  notes  are 
payable  at  an  office  or  store,  there  may  be  no  one  present 
authorized  to  make  payment;  the  place  may  be  closed, 
and  numerous  other  reasons  will  readily  suggest  them- 
selves, as  to  why  a  note  should  not  be  made  payable 
at  any  place  other  than  a  bank.  If  in  such  cases  as  just 
mentioned,  the  messenger  finds  no  one  to  whom  to 
present  the  paper,  he  is  justified  in  returning  it  unpaid, 
it  not  being  the  custom  to  make  more  than  one  attempt 
to  present  a  note,  and  the  law  requires  but  one  proper 
presentation  to  hold  the  parties  liable. 

13.  In  figuring  the  time,  exclude  the  date  and  in- 
clude the  day  of  payment. 

Secured  or  Collateral  Loans. 

Generally  speaking  it  is  easier  and  quicker  to  secure  a 
loan  properly  supported  by  collateral  than  it  is  to  obtain 
an  advance  on  open  credit  or  on  a  bill  receivable  dis- 
counted.    The  reason  is  that  in  most  banks  the  attend- 


BANK  LOANS  155 

ing  officers  have  the  authority  to  make  collateral  loans 
without  consulting  the  loan  committee,  while  in  dis- 
counting notes  on  open  credit  the  committee  must 
either  be  consulted  or  its  meeting  day  awaited.  There- 
fore the  business  man  can  pursue  no  more  helpful  poUcy 
than  to  invest  his  profits  in  such  form  of  collateral  as  is 
generally  acceptable  to  banks.  This  form  is  stocks 
and  bonds  hsted  on  the  various  stock  exchanges  and 
having  a  readily  ascertained  market  value.  Having 
such  a  line  of  investments  he  can  be  assured  of  obtaining 
money  quickly  from  his  bank  under  practically  all 
circumstances. 

One  of  the  great  mistakes  made  by  successful  men  is 
to  invest  profits  in  real  estate,  whether  for  investment 
or  for  speculation.  The  chief  trouble  with  real  estate 
is  its  slow  liquidation  and  the  ceremony  which  attends 
its  transfer  either  on  sale  or  as  security.  Whereas  to 
borrow  on  a  listed  stock  or  bond  simply  requires  the 
ascertainment  of  the  market  value  in  the  daily  paper, 
and  the  signature  on  the  back  of  the  certificate,  or  the 
execution  of  a  power  of  attorney,  the  pledging  of  real 
estate  requires  legal  formalities  such  as  search,  the  formal 
deed  or  mortgage,  or  assignment,  appraisal,  recording, 
tax  search,  etc.,  all  of  which  are  expensive  and  slow. 

Making  a  Collateral  Loan. 

Let  us  review  the  steps  necessary  to  secure  a  loan  on 
collateral  listed  on  the  New  York  Stock  Exchange.  You 
approach  the  banker  and  ask  for  a  loan  of  $4,000  and 
offer  as  security  the  following  stocks  and  bonds: 

10  shares  Anaconda  Copper 
10  shares  U.  S.  steel 
10  shares  Baltimore  and  Ohio,  pfd. 
1    Bethlehem  Steel  First  5s. 
1    Michigan  Central  5s.  1931 
Liberty  Bonds. 


156  THE  BUSINESS  MAN  AND  HIS  BANK 

The  banker  simply  turns  to  the  stock  exchange  sheet  of 
the  day  before  and  finds  the  quotations  to  be  as  follows: 


Anaconda  Copper,  68H 

$685 

U.  S.  Steel,  105>i 

1055 

B  and  0.  pfd.,  50K 

505 

Bethlehem  Steel  88^ 

885 

Michigan  Central 

940 

Liberty  Bonds  3rd  Issue,  95 

475 

$4545 

Finding  the  value  of  these  securities  to  be  $4545  the 
banker  offers  to  loan  you  80  per  cent,  of  the  market  value 
or  $3,600.  He  then  makes  out  a  collateral  note,  payable 
on  demand,  lists  the  security,  asks  you  to  sign  at  the 
bottom,  and  also  on  the  backs  of  the  stock  certificates. 
The  bonds  being  coupon  form  need  no  indorsement. 
He  makes  out  the  tickets  and  hands  to  the  bookkeeper 
and  you  are  immediately  credited,  or  given  a  cashier's 
check.     That  is  all  there  is  to  it. 

Loans  Secured  by  Real  Estate. 

Now  let  us  assume  you  are  the  holder  of  certain  mort- 
gages on  real  estate  and  make  the  same  request.  There 
must  first  be  an  inspection  of  the  property  covered  by 
the  mortgage  and  an  appraisal  by  the  bank's  committee. 
This  usually  costs  a  fee.  Then  the  attorney  will  satisfy 
himself  that  the  title  is  good.  This  may  be  done  by 
a  simple  "short  search,"  or  he  may  accept  your  title 
policy.  The  assignments  must  be  drawn  and  recorded. 
The  insurance  must  be  changed  to  run  to  the  bank  as 
mortgagee  so  that  in  case  of  fire  it  will  be  protected. 
All  this  is  costly,  for  the  attorney  will  exact  his  fee  for 
services.  The  real  estate  transaction  will  require,  it 
may  be  a  week  or  two,  and  the  stock  transaction  a  few 
minutes.  When  you  pay  off  the  loan,  the  banker  on 
the  one  hand  simply  hands  you  back  your  securities  and 


BANK  LOANS  157 

on  the  other  he  must  reassign  or  satisfy  the  mortgage, 
which  again  adds  to  the  cost. 

The  borrower  whose  wealth  is  represented  by  equities 
in  real  estate  may  in  his  own  mind  be  a  good  risk,  but 
real  estate  is  not  favorably  regarded  in  banking  circles, 
unless  it  be  free  and  clear,  for  otherwise  it  is  expensive 
to  carry.  ''Real  estate  poor"  describes  many  a  would- 
be  wealthy  individual.  Then  again,  it  is  often  unmar- 
ketable and  slow  in  turning  into  money.  It  should  be 
bought  judiciously  by  the  man  who  expects  to  borrow. 

Substitutions. 

In  collateral  loans,  banks  will  allow  the  borrower  to 
take  out  one  kind  of  security  and  substitute  another. 
The  only  requirement  is  that  the  security  offered  must 
be  of  equal  or  greater  value  than  that  withdrawn.  Brok- 
erage houses  carrying  large  quantities  of  stocks  and  bonds 
on  call  loans,  and  buying  and  selling  constantly  for 
themselves  and  clients,  are  obliged  to  obtain  securities 
in  order  to  make  deliveries  and  receive  payment  for 
the  same.  They  are  permitted  to  take  out  securities  on 
proper  order  and  substitute  others  and  thus  "clear" 
their  trades.  Banks,  in  dealing  with  private  clients  and 
located  outside  the  large  cities,  will  deliver  stocks  and 
bonds  by  mail  to  the  brokers  and  receive  payment  for 
their  clients;  and  the  brokers,  on  the  other  hand,  will 
send  stocks  and  bonds  to  banks  by  mail  for  clients  and 
receive  payment  through  the  bank;  but  in  Wall  Street 
transactions  these  deliveries  and  substitutions  are  made 
by  messengers  employed  by  the  brokerage  houses. 

The  Profitableness  of  Borrowing  on  Securities. 

It  is,  as  a  rule,  profitable  to  borrow  on  securities. 
Only  when  the  bank  rate  is  greater  than  the  income 
from  the  securities  will  this  be  a  losing  proposition. 
For  instance:  Here  is  a  $1,000  bond  paying  6  per  cent. 


158  THE  BUSINESS  MAN  AND  HIS  BANK 

or  $60  a  year.  You  need  eight  hundred  dollars.  The 
bank  will  loan  you  the  amount  at  not  over  6  per  cent, 
or  $48  a  year  and  you  draw  $60  a  year  on  the  bond, 
a  net  gain  of  $12.  You  have  your  cake  and  eat  it  too. 
On  the  other  hand,  an  individual  with  a  small  amount 
of  cash,  or  standard  stocks  and  bonds  may  find  it  profit- 
able to  buy  other  stocks  and  bonds  by  putting  up  the 
securities  already  owned,  or  the  cash  in  hand,  as  a  mar- 
gin on  the  purchase  of  the  other  securities.  This  can 
better  be  seen  by  a  practical  example,  which  the  aver- 
age bank  will  consider.  Let  us  suppose  an  indi- 
vidual owns  $500  of  Liberty  Bonds.  He  is  in  position 
to  buy  $2,500  worth  of  other  bonds,  by  lodging  the 
Liberty  Bonds  as  part  of  the  collateral,  the  purchased 
bonds  or  stocks  forming  the  other  part.  The  details 
of  the  transaction  would  be  as  follows: 

Presuming  he  were  to  buy  $2,500  of  bonds  netting  7  per  cent,  the 
income  would  be  $175  a  year. 

Add  $500  Liberty  Bonds  at  43^%  21.25.     Total  income  $196.25. 
Collateral  loan  $2,500  at  6  per  cent.     $150.00 
Net  income  $46.25,  or  .0945  per  cent,  on  the  $500. 

The  only  precautions  to  be  observed  are  first,  to 
obtain  the  loan  at  a  bank  and  not  ''on  margin"  through 
a  brokerage  house,  which  may,  in  a  panicy  market, 
sell  out  the  customer  and  thus  bring  a  loss;  and  second 
do  not  buy  speculative  securities.  All  banks  favor 
collateral  loans  that  are  well  secured  and  it  is  not  diffi- 
cult to  obtain  such  accommodation  as  above  suggested. 

Proper  Form  of  Collateral. 

One  of  the  essentials  in  borrowing  on  collateral  is 
that  the  stocks  and  bonds  shall  be  in  proper  form  for 
good  delivery  and  by  this  is  meant  in  such  form  as  will 
be  accepted  for  delivery  on  the  stock  exchanges.  Be- 
fore a  share  of  stock  can  be  transferred  on  the  books  of 
the  issuing  company  the  transfer  from  seller  to  buyer,  or 


BANK  LOANS  159 

from  the  borrower  to  the  lender,  must  comply  with 
certain  formahties.  It  ,must  be  signed  in  blank  and 
witnessed.  If  it  is  not  signed,  (and  many  borrowers 
prefer  not  to  sign  the  security  itself,)  there  must  be 
a  power  of  attorney  properly  executed.  The  bank 
as  lender  must  be  placed  in  position  to  sell  the  stock 
if  the  loan  is  not  paid  as  agreed,  and  it  must  be  in  posi- 
tion to  do  so  without  reference  to  the  borrower.  In 
the  fine  print  that  is  found  on  all  collateral  notes,  it 
is  provided  that  if  the  borrower  defaults  in  interest,  or 
fails  to  pay  the  loan  when  it  is  due,  or  if  a  demand 
loan,  when  payment  is  called  for,  then  the  bank  may 
sell  the  security  at  public  or  private  sale  without  notice 
to  the  borrower.  Any  balance  remaining  after  the 
claim  of  the  bank  is  satisfied  will,  of  course,  revert  to 
the  borrower. 

When  a  collateral  loan  is  made  the  intention  of  the 
borrower  is  to  pay  it  off  when  due.  He  does  not 
sell  the  collateral  to  the  lender,  but  pledges  it  as  se- 
curity. He  says  in  substance:  "I  expect  to  pay  this 
loan,  with  the  interest  as  agreed;  but  if  I  do  not,  you 
may  sell  the  security  in  a  regular  way  and  legal  manner, 
and  satisfy  your  debt.  I  find  no  fault  if  you  do  this, 
and  I  consent  to  these  conditions.  My  failure  will 
be  my  loss." 

The  usual  rule  is  to  require  a  margin  of  20  per  cent 
for  safety — that  is  the  bank  loans  80  per  cent  of  the 
market  value.  In  some  cases  a  margin  of  20  points 
is  required — that  is,  on  a  stock  selhng  at  $60  they  would 
only  loan  $40.  If  the  market  goes  down  to  the  point 
where  the  margin  of  safety  is  exhausted,  the  bank  may 
call  for  a  reduction  of  the  loan,  or  more  security;  and 
failing  to  receive  either,  it  may  call  in  the  loan.  Fail- 
ing to  pay  upon  such  a  call  the  security  would  be  sold 
and  the  debt   would   be  satisfied   from   the  proceeds. 


160  THE  BUSINESS  MAN  AND  HIS  BANK 

Warehouse  Loans. 

There  is  a  class  of  loans  known  as  ''warehouse 
loans"  that  is  very  common  in  banking  circles.  Such 
loans  are  secured  by  goods  in  storage  and  are  highly 
regarded  on  account  of  their  safety.  The  more  staple 
the  commodity,  the  higher  the  grade  of  the  loan,  and 
banks  are  everywhere  ready  to  make  advances  against 
such  articles.  There  are  three  requirements:  First, 
that  the  goods  be  stored  in  standard  warehouses  and 
proper  receipt  issued  for  the  goods,  the  return  of  the 
receipt  being  necessary  in  order  to  obtain  the  goods. 
This  is  called  the  non-negotiable  receipt,  meaning, 
it  cannot  be  passed  from  hand  to  hand  like  money. 
Second,  that  the  goods  be  of  the  quality  and  quantity 
specified.  The  receipt  of  the  warehouseman  usually 
gives  the  case  numbers,  or  quantity  of  articles,  barrels, 
etc.  and  the  character  of  the  goods  may  be  ascertained 
from  an  appraisal  or  from  the  original  invoices.  And 
third,  that  the  goods  shall  be  insured  in  favor  of  the 
lender.  Let  us  take  an  example.  You  desire  to  buy 
fifty  cases  of  canned  goods,  to  be  stored  by  the  X.  Y.  Z. 
Storage  Company  until  needed.  You  instruct  the  seller 
to  dehver  the  goods  to  the  warehouse  and  obtain  ware- 
house receipt  for  them  specifying  the  case  numbers. 
The  invoices  are  attached  to  the  receipt,  insurance  is 
effected,  and  these  instruments  are  taken  to  the  bank. 
The  bank  will  loan  60  per  cent,  of  the  invoice  price;  or 
in  other  words,  you  put  up  40  per  cent,  of  the  cost  and 
the  bank  advances  the  rest.  The  greater  part  of  goods 
of  all  kinds  in  storage,  is  carried  by  bank  loans;  and  the 
one  precaution  to  bear  in  mind  is  that  the  bank  wants 
the  goods  to  be  as  represented.  It  will  then  watch 
their  market  value. 

Any  goods  that  deteriorate,  or  spoil,  such  as  butter 
and  eggs,  fruits,  etc.,  will  not  be  as  readily  accepted  as 


BANK  LOANS  161 

canned  goods,  dry  goods,  rubber,  leather,  hides,  and 
other   articles   that   are   not   subject   to   the   elements. 

Banks  will  lend  freely  upon  grain  in  transit  and  in 
storage.  While  in  transit  it  is  represented  by  the  bill 
of  lading,  and  while  in  storage  by  the  elevator  receipt. 
For  instance  you  wish  to  buy  ten  cars  of  wheat  or  corn 
or  oats,  or  fift}^  bales  of  cotton.  As  soon  as  you  can 
present  the  bill  of  lading  for  the  shipment,  the  bank 
will  make  a  loan  on  the  security  of  the  papers,  which 
give  it  control  of  the  goods.  The  character  of  such 
commodities  as  wheat  and  cotton  is  certified  to  by  grad- 
ers who  inspect  the  grain  or  cotton  at  certain  points 
and  once  the  grading  is  made  it  will  be  accepted  in  all 
markets.  If  for  instance  a  cargo  of  wheat  is  graded  as 
No.  1  winter  wheat  at  Duluth,  this  grading  will  hold 
until  the  wheat  is  finally  delivered  to  the  mill.  The 
weight  is  of  course  certified  to  by  the  railroad  or  other 
carrier. 

Banks  have  different  customs  in  regard  to  such  loans, 
but  the  loans  themselves  are  easily  secured,  once  the 
proper  documents  are  in  hand. 

Goods  Held  in  Trust. 

Once  the  credit  of  the  business  man  is  established 
with  his  bank  he  may  have  the  bank  buy  goods  for  him 
and  allow  him  to  hold  them  in  trust  by  giving  what 
is  known  as  a  trust  receipt.  The  process  can  best  be 
described  by  a  simple  example.  Let  us  suppose  the 
A.  B.  Knitting  Mill,  of  Paterson,  is  in  such  credit  with 
its  bank  that  the  bank  will  buy  for  its  account  a  cargo 
of  raw  silk  from  Japan,  through  processes  elsewhere 
described.  The  silk  is  delivered  to  a  warehouse  in  New 
York.  The  mill  wants  ten  bales,  and  may  take  this 
amount  out  of  storage  by  giving  the  bank  a  trust  receipt 
whereby   it    acknowledges   having   received   the   goods 


162  THE  BUSINESS  MAN  AND  HIS  BANK 

as  the  property  of  the  bank,  for  the  purpose  of  manufac- 
turing mto  finished  silk,  and  agrees  to  hold  the  ten 
bales  and  the  product  thereof  as  the  property  of  the 
bank,  and  to  reimburse  the  bank  for  the  advances  so 
made  as  sales  are  made.  In  other  words  the  mill  is 
the  bank's  agent  to  turn  raw  silk  into  finished  silk, 
and  after  paying  the  bank  for  the  raw  material,  plus 
the  carrying  charges,  it  may  treat  the  balance  as  its 
own. 

Automobile  Loans. 

The  retailing  of  automobiles  has  reached  such  pro- 
portions that  the  average  dealer  is  not  strong  enough 
financially  to  procure  the  cars  necessary  to  meet  his 
demands.  In  order  to  secure  the  agency  for  any  well- 
known  car  a  certain  number  must  be  contracted  for  and 
taken,  not  as  the  dealer  makes  his  sales,  but  as  the  dis- 
tributing house  elects  to  send  the  cars,  which  must 
be  paid  for  in  cash  on  delivery. 

It  is  readily  apparent  that  the  dealer  must  be  financi- 
ally strong,  or  have  good  banking  connections  that  wiU 
give  him  sufficient  funds  to  take  up  these  deliveries 
as  made,  otherwise  he  will  be  unable  to  get  cars  and  his 
selling  efforts  will  be  considerably  hampered.  The 
problem,  therefore,  has  resolved  itself  into  finding  a 
method  of  operation  that  is  safe  on  the  part  of  the  lender 
and  not  too  costly  on  the  part  of  the  borrower. 

With  the  wide  demand  for  cars  of  certain  makes, 
they  have  become  good  collateral  in  the  same  sense 
that  any  stable  commodity  is  good  security  for  banking 
accommodations.  We  must  view  the  automobile  in 
the  same  light  as  articles  of  necessity  in  our  daily  affairs. 
While  we  cannot  class  automobiles  in  the  same  category 
as  meats  or  canned  goods,  yet  they  take  rank  toward  the 
front  as  liquid  collateral. 


BANK  LOANS  163 

The  most  workable  method  yet  devised  for  the  hand- 
ling of  automobiles  by  banks  is  on  the  trust  receipt, 
the  operation  of  which  can  be  seen  by  the  following 
practical  illustration. 

A  dealer  contracts  to  sell  fifty  cars  during  1920  and 
must  pay  cash  as  they  are  delivered,  this  delivery  being 
optional  with  the  jobber.  The  jobber  is  quite  hkely 
to  send  a  carload  of  cars  to  the  retailer,  whether  the 
latter  is  actually  in  need  of  them  or  not;  but  if  he  does 
not  take  them  up  he  may  not  be  able  to  obtain  cars  at 
all.  The  dealer  therefore  arranges  through  his  local 
bank  that  as  the  cars  are  deUvered,  the  bank  will  ad- 
vance 80  per  cent,  of  the  cost  price  of  the  car  at  the 
factory,  making  the  dealer's  investment,  the  freight, 
and  20  per  cent,  of  the  factory  cost.  A  demand  note  is 
taken  for  the  amount  and  a  trust  receipt  given,  describ- 
ing the  car  by  name,  car  number  and  type.  This  trust 
receipt  stipulates  that  the  loan  is  made  for  the  purpose 
of  purchasing  the  car  mentioned,  that  the  car  is  the 
property  of  the  bank,  and  is  held  for  its  account  by  the 
dealer  as  warehouseman.  He  agrees  to  keep  the  same 
properly  insured  against  fire  and  theft,  not  to  use  it  for 
demonstration,  and  to  sell  only  upon  the  release  of  the 
bank.  Whenever  a  car  is  sold,  the  loan  is  paid  off  and 
the  release  issued.  If  a  car  should  be  sold  without  this 
release  or  payment  of  the  loan,  the  bank  could  follow 
the  car  wherever  it  might  be  found  and  reclaim  it.  In 
other  words,  the  dealer  would  be  guilty  of  conversion. 
The  risk  is  two-fold;  first,  that  the  dealer  may  not  be 
a  man  of  honor  and  therefore  sell  without  the  release, 
which  would  be  risky:  and  second,  the  character  of  the 
car.  It  would  not  be  a  safe  proposition  on  a  new  and 
untried  car,  nor  would  it  be  advisable  on  cars  of  an 
expensive  type,  but  it  is  perfectly  workable  on  standard 
cars  running  under  $2,000. 


164  THE  BUSINESS  MAN  AND  HIS  BANK 

The  writer  has  been  instrumental  in  bringing  in  for 
dealers  during  the  last  three  years  hundreds  of  cars  on 
this  plan  without  a  single  miscarriage.  If  a  car  is  sold 
on  time  payments  or  notes  are  taken  for  the  unpaid 
balance,  it  is  for  the  bank  to  determine  whether  it  will 
issue  a  release  and  take  what  the  dealer  gets  in  payment, 
or  insist  upon  all  cash. 

The  above  plan  is  elastic,  safe  and  helpful,  and  can  be 
operated  in  any  territory  by  any  bank  that  will  grasp 
the  significance  of  the  idea  and  the  practicability  of  its 
operation. 

Loans  on  Accounts  Receivable. 

During  the  past  few  years  a  practice  has  arisen  of 
l)orrowing  on  assigned  accounts  receivable,  a  practice 
which  has  grown  to  large  proportions,  and  has  its  favor- 
able and  unfavorable  sides.  While  banks  in  general 
do  not  follow  this  practice,  many  make  such  loans  to 
well  known  customers,  but  the  bulk  of  these  loans  is 
made  by  ''commercial  bankers"  who  specialize  in  this 
form  of  banking  and  find  it  exceedingly  profitable. 

The  loan  usually  takes  the  form  of  a  note  secured  by 
an  assignment  of  accounts  receivable.  The  original 
invoices  together  with  the  shipping  receipts  are  produced 
as  evidence  of  the  sale  and  delivery  of  the  goods,  and  a 
margin  of  from  20  to  40  per  cent,  is  required.  The  pro- 
fit to  the  banker  arises  from  the  fact  that  while  standard 
interest  rates  are  charged,  the  charge  is  based  upon  the 
whole  amount  of  the  collateral,  and  besides  there  is  a 
fee,  called  a  service  charge,  of  about  S5  per  thousand 
dollars,  which  adds  to  the  cost  of  the  loan,  and  at  the 
same  time  to  the  profits  of  the  lender. 

Banks  as  a  rale  do  not  favor  this  form  of  borrowing 
since  it  pledges  the  most  liquid  asset  of  the  firm,  and 
credit  statements  often  require  information  as  to  the 
prevalence  of  this  practice  on  the  part  of  the  borrower. 


BANK  LOANS  165 

It  is  likewise  an  evidence  of  financial  weakness, 
inasmuch  as  the  borrower  could,  if  in  good  standing, 
obtain  ample  credit  with  the  banks  and  need  not  resort 
to  this  expensive  form  of  credit.  That  there  is  need 
for  such  loans  and  satisfaction  on  both  sides  is  evidenced 
by  the  growth  of  these  companies  and  the  ever  increasing 
number  of  merchants  and  manufacturers  resorting  to 
this  method  of  financing.  There  is  undoubtedly  a 
favorable  side  as  respects  the  borrower,  for  it  gives 
him  immediate  use  of  the  money  represented  by  the 
accounts  receivable,  and  the  costliness  of  the  loans  is 
offset  by  the  quick  payment. 

Borrowing  on  Receivables. 

The  operation  of  this  form  of  borrowing  and  the 
advantage  even  in  a  ten  day  credit  will  be  seen  by  an 
illustration.  The  A.  B.  C.  Furniture  company  has 
sold  a  bill  of  goods  to  a  New  York  department  store 
that  pays  cash  in  ten  days.  As  soon  as  the  goods  are 
shipped,  the  firm  will  take  a  copy  of  the  original  invoices 
and  shipping  receipts  to  the  commercial  banker,  make 
out  proper  note,  and  immediately  receive  80  per  cent, 
of  the  amount  of  the  sale.  The  agreement  is  that  the 
original  check  received  from  the  department  store  will 
be  sent  to  the  banker  as  soon  as  received,  and  even 
though  the  bill  is  paid  as  soon  as  the  goods  arrive  and 
audit  can  be  made,  the  manufacturer  will  have  had  his 
money  a  week  or  more  before  the  check  comes  to  hand. 

There  are  two  methods  in  vogue,  the  notification  and 
non-notification.  In  the  former  the  buyer  is  advised 
that  the  account  has  been  assigned,  and  in  the  latter 
no  knowledge  reaches  him  that  the  account  has  been 
pledged.  In  the  first  case  the  remittance  will  go  direct 
to  the  banker,  and  in  the  other  to  the  seller  and  by  him 
turned  over  to  the  banker  for  credit  on  the  loan. 


166  THE  BUSINESS  MAN  AND  HIS  BANK 

There  is  but  one  safe  course  to  follow  where  this 
practice  is  pursued,  and  that  is  to  so  indicate  on  the 
statement,  or  to  do  so  by  advice  and  consent  of  the 
banker  where  the  regular  account  is  carried. 

There  are  cases  where  the  bank  may  not  be  large 
enough  to  extend  sufficient  credit  to  the  customer  and 
such  borrowing  may  be  advisable;  but  this  can  be  over- 
come by  selecting  another  and  larger  and  perhaps  more 
liberal  bank.  Or,  it  may  be,  the  borrower  has  exhausted 
his  bank  credit  and  must  needs  resort  to  other  fields  of 
borrowing,  and  if  so  it  is  a  danger  signal  which  is  well 
to  heed.  However,  the  writer  has  seen  many  cases 
where  firms  have  been  entitled  to  considerably  more 
credit  than  their  local  bank  would  allow  and  were 
justified  in  going  to  other  banks  with  the  accounts; 
the  reason  for  the  restricted  credit  being  inadequate 
knowledge  of  business  and  unfamiliarity  with  credit 
operations  on  the  part  of  the  bank  officials.  It  is  no 
unusual  thing  to  find  a  firm  entitled  to  a  fine  of,  say 
$10,000  credit  on  their  own  paper,  hmited  to  half  this 
amount  and  that  only  on  collateral,  by  banks  that  are 
dominated  by  men  whose  ideas  regarding  loans  and  credit 
were  obtained  in  the  narrow  sphere  of  their  own  business 
and  who  are  in  no  position  to  pass  upon  the  require- 
ments of  other  men.  In  short,  they  endeavor  to  run  a 
bank  as  they  have  run  their  own  business,  and  apply 
the  same  crude  and  illogical  ideas,  to  the  detriment 
of  the  bank  and  its  customers. 

Whether  the  custom  of  loaning  against  accounts 
receivable  be  good  or  bad,  it  is  here  to  stay,  and  the 
problem  is  to  make  it  sound  in  its  operation  and  satis- 
factory to  both  borrower  and  lender,  leaving  the  question 
of  cost  and  profit  to  be  settled  between  them. 


CHAPTER  XX 
COLLECTIONS 

Banks  carry  a  great  many  accounts  that  are  un- 
profitable and  some  that  are  a  distinct  loss.  The  only 
justification  that  can  exist  for  such  practices  is  service 
to  the  public  and  the  philanthropic  spirit  that  must 
attend  bank  administration.  It  can  readily  be  seen 
that  the  account  that  shows  practically  no  balance, 
cannot  result  in  a  profit  on  account  of  the  labor 
cost  of  handling  it,  together  with  the  actual  cost  of 
stationery  used  in  its  operation.  While  some  accounts 
are  small,  they  are  accepted  because  of  their  peculiar 
setting  and  their  relationship  to  other  accounts.  These 
are  looked  upon  in  the  same  Ught  as  the  grocer  regards 
the  sale  of  sugar  or  kerosene  oil,  namely- — as  an  un- 
welcome necessity.  In  handling  such  accounts  the  bank 
renders  a  real  service  that  cannot  be  obtained  elsewhere, 
no  matter  how  much  the  customer  may  value  the  con- 
nection as  viewed  from  his  own  end. 

There  are  many  other  features  that  attend  banking 
that  are  unprofitable  and  constitute  the  unrequited 
part  of  banking  service  that  makes  for  the  common  good. 
Among  these  may  be  mentioned  collections.  The  man 
who  steps  up  to  the  teller's  window  and  asks  to  have  a 
check  cashed  forgets  too  often  that  he  confers  no  favor 
upon  the  bank,  but  rather  is  asking  one.  And  what  shall 
be  said  of  the  business  man  who  collects  his  notes, 
coupons  and  drafts,  through  his  bank  without  effort 
or  risk  or  cost? 

167 


168  THE  BUSINESS  MAN  AND  HIS  BANK 

Various  Kinds  of  Collections. 

Collections  may  be  divided  into  classes:  (1)  The  collec- 
tion of  notes  held  hy  the  customer.  For  instance  A  in 
New  York  holds  the  note  of  B  in  Texas  for  $1,000, 
due  at  the  Dallas  National  Bank  on  a  certain  date 
three  months  hence.  It  must  be  presented  at  the  bank, 
on  the  day  it  is  due  if  it  is  to  be  properly  and  lawfully 
presented.  He  simply  hands  it  to  the  collection  clerk 
and  the  banking  machinery  will  see  that  the  note  is 
presented  properly  at  the  appointed  time,  and  the 
proceeds  returned,  or  prompt  notice  given  him  of  non- 
payment. The  charge,  if  any,  will  be  made  at  the  other 
end,  and  so  far  as  the  collecting  bank  is  concerned,  it  is  a 
labor  of  love — part  of  the  service  that  goes  with  a  cus- 
tomer's account. 

2.  Collection  of  Coupons.  Banks  handle  large  num- 
bers of  coupons,  and  increasingly  so  since  the  Liberty 
Loans.  If  the  coupons  are  of  standard  concerns,  gov- 
ernments, municipalities,  railroads,  industrial  organi- 
zations of  recognized  standing,  they  are  received  as 
cash.  If  their  payment  is  doubtful  they  are  received 
"for  collection."  They  must  be  accompanied  by  proper 
blanks  for  income  tax  purposes,  and  are  sent  by  regis- 
tered mail,  insured,  all  of  which  requires  additional  labor 
and  care  and  entails  considerable  expense. 

3.  The  collection  of  checks  which  are  doubtful  or  irregu- 
lar. Such  items  are  not  received  as  cash,  but  are  sent 
forward  for  payment  by  the  receiving  bank  as  a  special 
safeguard  or  as  a  special  favor. 

4.  The  transmission  of  papers  which  are  to  he  delivered 
upon  certain  conditions.  Thus,  A  in  New  York  holds 
a  mortgage  on  property  in  Pennsylvania,  which  it  is 
to  be  paid  off.  He  does  not  want  to  deliver  the  papers 
until  payment  has  been  made  to  his  agent,  and  so  takes 
the   papers  to  his  bank  with  instructions  to  forward 


COLLECTIONS  169 

them  to  its  correspondent,  to  be  delivered  upon  the 
payment  of  a  specified  sum.  The  bank  will  then  send 
the  documents  to  its  correspondent  and  when  the  amount 
is  paid  the  delivery  will  be  made. 

5.  Drafts  for  Collection.  We  can  best  illustrate  the 
latter  class  by  a  simple  and  practical  illustration.  The 
A.  B.  Truck  Co.  in  Detroit  has  sold  an  automobile 
truck  to  a  farmer  on  Long  Island.  The  condition  is 
that  he  shall  pay  $500  upon  delivery  and  execute  twenty 
promissory  notes  and  a  conditional  bill  of  sale  for  the 
truck  before  he  can  obtain  delivery.  The  truck  is 
shipped  by  rail.  The  Company  draws  a  draft  on  the 
farmer  for  $500,  makes  out  the  notes  and  conditional 
bill  of  sale  on  its  regular  forms,  obtains  the  bill  of  lading 
from  the  carrier  and  hands  them  to  its  bank  with  in- 
structions to  deliver  the  bill  of  lading  only  upon  payment 
of  the  draft  and  the  signing  of  the  notes  and  bill  of  sale. 
Upon  the  arrival  of  the  truck  the  carrier  will  notify 
the  farmer  that  the  shipment  has  arrived.  The  firm 
will  also  have  advised  him  that  the  draft,  bill  and  notes 
have  been  forwarded  to  the  local  bank  for  collection. 
When  the  bank  receives  the  papers  it  too  will  send  notice 
and  when  he  pays  the  bank  the  $500,  signs  the  notes 
and  bill  of  sale,  he  will  get  his  bill  of  lading  and  with  it 
the  truck. 

There  is  some  risk  in  such  a  transaction,  for  should  the 
farmer  be  allowed  to  take  the  bill  of  lading  without 
signing  the  other  documents,  the  bank  will  be  liable. 
It  cost  a  large  bank  in  New  York  nearly  $2,000  a  short 
time  ago  through  failure  to  get  the  signature  to  such  a 
bill  of  sale.  The  purchaser  having  apparent  title  to 
the  car,  mortgaged  it  before  the  error  was  discovered 
and  the  bank  was  held  liable  to  the  seller. 

If  the  farmer  refuses  to  sign  the  papers  he  cannot  get 
the  truck.     As  a  rule  such  shipments  are  made  in  the 


170  THE  BUSINESS  MAN  AND  HIS  BANK 

name  of  the  shipper,  and  title  never  passes  out  of  him 
until  the  bill  of  lading  is  properly  indorsed  and  delivered. 
The  foregoing  would  be  called  a  ''draft  with  bill  of 
lading  attached."  It  is  a  common  form  of  collection, 
used  in  large  numbers  by  business  houses  and  is  a  safe 
and  practical  way  of  shipping  goods  to  those  whose 
credit  standing  may  not  warrant  an  open  credit. 

"Duns." 

There  is  another  class  of  collections — ''duns, "  that  are 
often  regarded  as  a  nuisance.  They  consist  of  small 
drafts  used  by  merchants  to  collect  small  debts  where 
other  methods  have  failed.  The  process  can  best  be 
seen  by  illustration.  The  American  Law  Book  Company 
has  sold  a  set  of  books  to  a  lawyer  in  a  distant  town, 
on  agreed  terms  of  credit.  The  bill  remains  unpaid 
for  a  long  time  after  due,  and  letters  of  request  for  pay- 
ment are  of  no  avail.  The  firm  then  sends  notice  that 
if  not  settled  within  five  days,  it  will  draw  on  the  debtor. 
This  it  does  by  delivering  its  sight  draft  to  the  bank 
"for  collection."  The  receiving  bank  sends  postal 
card  to  the  lawyer  notifying  him  that  it  holds  draft 
on  him  for  a  certain  sum,  drawn  by  the  book  company. 
He  pays  no  attention  to  the  matter  and  after  a  few 
days  the  draft  is  returned. 

So  frequent  have  these  drafts  become  that  many  banks 
refuse  to  recognize  them  unless  accompanied  by  a  small 
fee,  usually  about  fifteen  cents,  to  cover  postage,  labor 
and  handhng. 

Many  of  these  drafts  are  presented  by  messenger, 
thus  adding  to  the  cost  of  collection.  If  paid  by  the 
drawee,  the  collecting  bank  will  remit  to  the  bank 
sending  the  item,  or  credit  the  amount  to  the  bank  from 
which  it  was  received.  Many  banks  send  all  such  items 
to  regular  correspondents,  thus  adding  to  the  number 


COLLECTIONS  171 

of  handlings  with  the  attendant  costs.  For  these  ser- 
vices the  bank  actually  collecting  the  items  deducts  a 
small  fee,  but  as  a  rule  the  home  bank  does  not,  credit- 
ing the  amount  to  the  customer  as  a  collection,  at  cost. 
Such  collections  are  of  course  given  attention,  but 
the  drawee  is  never  pressed  for  payment,  notification 
being  sufficient,  unless  it  is  requested  in  the  collection 
advice  to  place  the  matter  in  the  hands  of  attorney 
if  collection  is  dishonored.  Many  times  these  "duns" 
produce  good  results,  but  when  their  harmless  charac- 
ter becomes  known  to  the  debtors  they  are  often  ignored. 
When  the  collection  is  returned  the  reason  for  its  re- 
fusal is  usually  given  on  an  attached  slip,  among  which 
are: 

■'No  Attention  to  Notice" 
"Will  Remit  by  Check" 
"Does  not  Owe  this  Bill" 
"Amount  Incorrect" 
"Refuses  to  Pay  Exchange" 
"No  Such  Party,"  etc. 

Collections  are  given  more  detailed  care  than  checks, 
being  recorded  in  the  collection  register  by  number, 
(for  identification)  maker,  drawee,  date,  time,  to  whom 
sent,  amount,  when  due,  and  fate.  This  must  be  done 
at  both  ends,  and  the  labor  cost  of  handling  collections 
is  much  greater  than  in  handling  checks. 

Collections  are  not  as  a  rule  credited  until  actually 
paid.  The  bank  may  enter  them  in  the  pass  book, 
"short  extended "  or  in  the  back  of  the  book  as  a  memor- 
andum for  tracing  purposes;  but  they  are  usually  treated 
as  ''time  items"  and  credited  only  when  paid. 

If  the  dunning  drafts  must  be  used  as  a  collecting 
process — and  in  many  instances  they  are  honored- — the 
surest  way  to  get  good  service  is  to  enclose  a   self  ad- 


172  THE  BUSINESS  MAN  AND  HLS  BANK 

dressed  envelope  and  a  small  fee,  fifteen  or  twenty 
cents,  and  the  receiving  bank  will  gladly  give  the  col- 
lection attention;  but  where  no  fee  accompanies  they 
are  often  merely  filed  and  returned  when  postage  is  sent. 

Grain  Drafts. 

Drafts  are  employed  in  large  numbers  in  grain  ship- 
ments, and  here  we  find  their  proper  use.  A  simple 
illustration  will  show  the  process.  The  Western  Milling 
Company  in  Minnesota  has  sold  a  car  of  oats  to  a  dealer 
in  New  York  State,  cash  on  delivery  of  the  goods.  As 
soon  as  the  car  is  loaded  the  invoice  is  made  out,  bill 
of  lading  secured  from  the  railroad  company  and  draft 
drawn  to  cover  the  amount.  The  three  documents  are 
given  the  Minnesota  bank  for  collection.  The  latter 
will  forward  to  the  local  bank  (it  is  sometimes  agreed 
upon  at  the  time  of  sale  what  bank  shall  receive  the 
draft  for  collection,  the  buyer  designating  his  own  bank) 
for  collection.  Inasmuch  as  the  arrival  of  the  car  is 
uncertain,  these  drafts  are  drawn  payable  "upon  arrival 
of  the  car"  and  are  called  ''arrival  drafts."  As  soon 
as  the  car  arrives,  the  dealer  will  be  notified  and  will 
take  up  the  draft  and  thus  obtain  the  bill  of  lading 
which  insures  delivery  of  the  goods.  Frequently  the 
instructions  will  allow  inspection  of  the  goods  before 
the  draft  is  paid.  Shipments  of  produce  from  farmer 
to  commission  merchant  in  the  large  cities,  butter,  eggs, 
etc.  are  also  sent  upon  draft  with  bill  of  lading,  the  pur- 
pose being  to  make  it  a  cash  transaction  upon  arrival 
of  the  goods  and  this  method  aecompUshes  the  purpose 
admirably. 

In  many  instances  the  bank  will  advance  money  on 
the  bill  of  exchange  or  draft  accompanied  by  a  bill  of 
lading.  Thus  in  the  oats  case,  the  Minnesota  bank 
might  give  credit  to  the  customer  for  the  face  of  the 


COLLECTIONS  173 

draft  on  the  strength  of  having  tlie  goods  under  its 
control,  of  standard  quality  and  of  readily  ascertained 
market  value. 

Cotton  is  shipped  on  this  plan  to  a  very  large  degree, 
the  essence  of  the  transaction  being  the  bill  of  lading 
which  controls  the  ownership  of  the  goods.  The  cotton 
dealer  is  therefore  assured  of  payment  for  his  cotton 
as  soon  as  it  is  loaded  and  bill  of  lading  issued  by  the 
carrier. 

In  recent  years  the  carriers  have  become  more  strict 
in  regard  to  the  bills  of  lading.  Whereas  before  it  was 
an  easy  matter  to  obtain  possession  of  goods  by  merely 
calling  for  them  and  paying  the  freight,  it  is  now  im- 
possible to  obtain  goods  without  the  shipping  documents. 
Gross  frauds  crept  into  the  former  practice  and  large 
losses  followed  the  loose  methods  of  former  days;  but 
a  bill  of  lading  is  now  quite  conclusive  evidence  of  the 
existence  of  the  goods  and  of  control  over  their  dis- 
position. 

Parties  to  a  Collection. 

The  parties  to  a  collection  are:  Draw^er — the  one  who 
signes  the  draft;  drawee- — the  one  directed  to  pay  the 
draft;  payee — the  party  (usually  a  bank)  to  whom 
payment  is  to  be  made;  indorser- — who  is  in  the  first 
instance,  the  payee;  acceptor- — the  drawee  after  signing 
the  draft  across  the  face,  or  writing  the  w^ords  "Accepted" 
with  the  date  and  his  name  underneath. 

Drafts  are  drawn  payable  at  sight,  a  certain  number 
of  days  after  sight  (presentation)  or  at  a  certain  time 
designated.  In  order  to  be  properly  presented  they 
must  be  presented  at  the  time,  at  the  place  and  to  the 
party  drawn  upon;  and  any  deviation  from  this  rule 
will  waive  the  legal  rights  against  the  interested  parties. 

The  acceptor  of  a  draft  cannot  change  the  time  or 


174  THE  BUSINESS  MAN  AND  HIS  BANK 

the  amount;  but  he  may  make  it  payable  at  his  bank 
and  it  then  becomes  an  order  on  his  bank  to  pay  the 
amount  and  charge  his  account. 

Recall  of  Notes. 

Inasmuch  as  it  is  the  custom  to  send  notes  to  the  place 
of  payment  so  that  they  will  be  at  the  paying  bank  on 
the  day  due,  anything  that  changes  the  original  tenor  of 
the  instrument  will  interrupt  the  smooth  working  of  the 
bank  machinery.  Notes  that  are  ready  for  presentment 
are  often  recalled  at  the  last  moment.  A  renewal  may 
have  been  arranged  for  or  the  maker  of  the  note  may  send 
his  check  to  the  discounting  bank  to  take  up  the  note, 
forgetting  that  it  is  far  better  to  meet  the  note  at  the 
place  where  it  is  to  be  paid. 

A  recall  must  go  through  the  same  channels  as  the 
original  note.  It  can  take  no  cross  cuts.  For  instance: 
A  Chicago  bank  holds  a  note  due  in  Poughkeepsie,  N.  Y. 
It  will  send  the  note  to  Albany  and  the  Albany  bank  will 
send  it  to  the  place  of  payment.  If  for  any  reason  the 
maker  concludes  to  renew  it,  or  sends  his  check  to  the 
Chicago  bank  after  the  note  has  left  its  hands,  the  recall 
must  go  from  the  discounter  of  the  note  to  the  Chicago 
bank,  from  Chicago  to  Albany  and  from  Albany  to 
Poughkeepsie.  Banks  will  only  honor  recalls  when  sent 
by  the  bank  from  which  they  received  the  item.  Such 
transactions  involve  needless  labor  and  expense  and 
should  be  avoided  as  much  as  possible.  Some  banks 
make  a  charge  for  recalling  notes  as  a  penalty  for  inter- 
fering with  the  regular  course  of  collections  and  to 
cover  the  expense  attending.  Where  the  telephone  is 
used,  especially  for  long  distance  recalls,  the  expense  is 
considerable.  Banks  are  under  no  obligation  to  recall 
items  and  to  do  so  is  a  courtesy  on  their  part.  Use  it, 
but  do  not  abuse  it. 


CHAPTER  XXI 
HOW  TO   READ   A  BANK   STATEMENT 

Banking  is  a  public  function,  performed  for  private 
gain.  While  the  profits  of  a  bank  accrue  to  the  owners, 
these  profits  arise  from  the  employment  of  funds  received 
from  the  public  at  large.  Were  it  not  for  the  deposit 
function  of  the  bank,  it  could  not  exist,  and  because  of 
the  fact  that  it  holds  itself  out  as  qualified  and  able  to 
employ  safely  these  funds  it  becomes  a  profit  making 
institution  for  the  stockholders.  It  occupies  a  position 
of  honor  and  trust  that  is  pecuUar  to  itself  and  sacred 
in  its  obligations. 

It  has  long  been  recognized  as  a  proper  function  of  the 
state  to  regulate  and  supervise  banking  institutions, 
to  the  end  that  the  interests  of  the  public  may  be  safe- 
guarded. It  is  part  of  the  police  power  of  the  state. 
All  states  have  banking  acts.  Some  of  these  are  crude 
and  poorly  drawn,  and  can  hardly  be  dignified  by  the 
term  ''banking  laws,"  while  others  have  well  nigh 
perfect  banking  acts  that  have  been  developed  from  time 
to  time  as  changes  have  been  found  necessary.  As  a 
matter  of  fact  the  latter  predominate,  the  degree  of 
excellence  reaching  its  highest  point  in  such  states  as 
New  York  and  Massachusetts.  In  fact,  it  is  difficult 
to  imagine  a  more  excellent  set  of  banking  laws  than 
obtains  in  New  York  at  the  present  time. 

The  National  Banking  Act  which  dates  from  the  Civil 
War  is  the  controlling  power  as  concerns  national  banks, 
and  embraces  more  institutions  than  any  other  banking 
legislation,  the  number  of  these  banks  being  upwards 
of  8,000. 

175 


176  THE  BUSINESS  MAN  AND  HIS  BANK 

Having  a  set  of  rules  and  principles  for  the  guidance 
of  banks,  it  becomes  necessary  to  see  that  they  are 
enforced.  We  have  therefore  the  office  of  Comptroller 
of  the  Currency  as  supervising  head  of  the  national 
banks,  and  a  banking  department  in  each  state  to  over- 
see the  banks  and  trust  companies  working  under  state 
charters.  This  work  is  so  highly  technical  and  of  such 
volume  and  character  that  it  is  generally  made  a  sepa- 
rate department,  although  in  some  states  it  is  combined 
with  the  State,  or  Insurance  Department. 

The  work  of  this  department  is  to  supervise  banking 
institutions  by  calhng  for  frequent  reports  and  to  in- 
quire more  closely  into  their  affairs  by  frequent  examina- 
tions. These  examinations  are  made  by  paid  examiners 
sometimes  appointed  by  the  Comptroller  or  Superinten- 
dent of  Banks  at  will,  or  from  civil  service  tests.  The 
examiners  report  for  duty  without  previous  warning 
and  make  a  detailed  audit  of  the  bank.  Examinations 
are  also  required  to  be  made  by  the  directors,  both  as  a 
rule  at  six  months'  intervals. 

Whether  a  bank  is  a  half-billion  dollar  bank  in  New 
York,  or  a  hundred  thousand  dollar  bank  in  the  moun- 
tains, it  must  keep  the  same  books  of  record,  make  the 
same  reports  and  is  subject  to  the  same  examinations. 
It  is  a  difference  in  degree  but  not  in  kind.  The  one 
handles  millions  and  the  other  thousands,  but  the  books 
of  the  latter  would  answer  the  general  purposes  of  the 
former.  Barring  the  impressiveness  of  large  figures 
received  from  many  sources,  the  general  bookkeeper  of 
the  country  bank  could  keep  the  books  of  the  city  bank 
and  be  perfectly  at  home. 

Therefore,  if  the  statements  originate  from  the  same 
general  sources,  the  ability  to  understand  the  statement 
of  a  small  bank  qualifies  the  reader  to  understand  the 
statement  of  a  large  one.     We  shall  take  the  statement 


HOW  TO  READ  A   BANK  STATEMIINT  177 

Report  of  the  Condition  op  the  Bank  of  Blankville  at  the 
Close  of  Business  on  the  First  Day  of  January,  1920. 

Resources : 

Bond  investments, viz.: 

Public  Securities $1,489,752 .  57 

Private  Securities 1,363,054 .  04 

Banking  House 75,000.00 

Real  Estate  Owned 59,607  54 

Land  Contracts 18,065  S5 

Mortgages  owned 300,000 .  00 

Loans  and  discounts  secured  by  bond 

and  mortgage  deed  or  other  real 

estate  collateral 121,326 .  77 

Loans  and  discounts  secured  by  other 

collateral 1,288,887 .  22 

Loans,  discounts  and  bills  purchased 

not  secured  by  collateral 1,528,689.83 

Overdrafts 1,551 .  70 

Due  from  approved  reserve  deposit- 
aries, less  amount  of  offsets 165,147. 18 

Due  from  Trust  Companies,  banks 

and  bankers  not  included  in  pre- 
ceding item 43,500.63        208,647.81 

Specie 16,349.22 

Other   currency   authorized    by   the 

Laws  of  the  United  States 197,600.01 

Cash  items,  viz.: 

Exchanges    and    checks    for    next 

day's  clearings 194,297.76 

Other  cash  items •        1,259.83  195,557.59 

Other  assets,  viz. : 

War  Savings  Stamps 245 .  00 

Furniture  &  Fixtures 806.05 

Accrued  interest  not  entered  on 

books   at   close   of   business   on 

above  date 51,656.40 

Customers    liability    on    account    of 

acceptances 150,000.00 

7,066,797.60 
12  ' 


178  THE  BUSINESS  MAN  AND  HIS  BANK 

Liabilities : 

Capital  stock 200,000.00 

Surplus  fund 170,000.00 

Undivided  Profits 35,906 .  36         205,906 .  36 

Deposits : 

Deposits  by  the  State  of  New 

York 32,000.00 

Postal  Savings  deposits 4,449.33 

Deposits  subject  to  check 2,031,729.58 

Demand  certificates  of  deposit .  .  28,036 .  00 

Deposits  withdrawable  only  on  pre- 
sentation of  pass  books 4,282,556.53 

Cashier's  checks  outstanding,  in- 
cluding similar  checks  of  other 
officers 2,165.99 

Certified  checks 8,656.38 

Due  trust  companies,  banks  and 

bankers 5,597.43 

Total  Deposits 6,395,191 .  24 

Bills  payable,  including  indebted- 
ness for  money  borrowed,  repre- 
sented by  notes,  certificates  of 
deposit  or  otherwise 50,000.00 

Other  liabilities,  viz.: 

Reserves  for  taxes,  expenses,  etc.. .  15,000.00 

Interest  accured  to  depositors 35,200.00 

Estimated  unearned  discounts 15,500 .  00      65,700 .  00 

Liability  on  account  of  acceptances 

executed  for  customers 150,000.00 


$7,066,797.60 


HOW  TO  READ  A  BANK  STATEMENT  179 

of  a  typical  bank  and  trace  each  item,  showing  its 
derivation  and  its  place  in  the  balance  sheet.  While 
the  order  of  the  items  and  the  arrangement  in  the 
statement  may  differ,  they  represent  precisely  the  same 
thing  whatever  the  character  of  the  bank. 

Much  can  be  learned  about  a  bank  from  its  published 
statements,  particularly  if  the  reports  are  kept  for  futures 
reference  so  that  comparison  is  possible.  The  growth 
in  deposits,  additions  to  profits,  and  variations  in  the 
other  items  may  be  followed  if  this  is  done.  For  in- 
stance in  a  recent  report  of  a  bank,  it  was  found  that  it 
had  undivided  profits  of  $25,000.  In  the  report  a  year 
previous  it  showed  $50,000,  while  its  capital  and  surplus 
remained  the  same.  At  first  sight,  it  was  presumed 
the  management  had  ''marked  down"  the  bonds,  but 
these  were  practically  the  same  as  a  year  previous. 
Therefore  nothing  else  could  have  affected  this  state- 
ment thus  except  the  ''cutting  of  a  melon"  and  this 
would  have  been  known  to  the  stockholders.  They 
might  have  increased  salaries  of  the  favored  few,  but 
hardly  in  such  proportion.  Only  one  conclusion  could 
be  drawn — they  had  charged  off  losses.  They  had  not 
only  run  behind  $25,000  in  their  undivided  profits  but 
had  also  sacrificed  a  year's  earnings. 

Bond  Investments. 

This  item  represents  the  amount  invested  in  bonds  of 
various  kinds.  They  may  sometimes  be  found  classified 
into  "pubhc"  and  "private"  securities,  as  in  this  case, 
"government  obligations,"  etc.  The  figures  given  are 
the  value  at  which  they  are  held  by  the  bank,  commonly 
called  the  "book  value."  This  value  is  presumed  to  be 
the  market  value,  or  selhng  price.  It  is  the  poHcy  of 
the  best  managed  banks  to  mark  their  bonds  at  the 
market  price,   which  is  conservative  to  say  the  least. 


180  THE  BUSINESS  MAN  AND  HIS  BANK 

It  depends  largely  upon  the  attitude  of  the  examining 
authorities.  Some  are  strict  and  compel  adjustments  as 
bonds  shrink  or  advance  in  value;  and  no  set  rule  can 
be  given.  During  the  war  period  prices  deemed  ''con- 
servative" in  a  normal  market  were  accepted. 

It  must  be  borne  in  mind  that  a  bank  is  a  going  con- 
cern. It  does  not  go  out  of  business.  It  sells  securities 
to  take  care  of  its  customers'  needs  but  rarely.  As  a 
rule  it  holds  securities  until  maturity,  or  sells  if  at  all 
at  a  profit.  And  a  bank  should  no  more  be  compelled 
to  show  the  selling  out  price  of  its  securities  than  a 
merchant  should  be  compelled  to  list  his  stock  at  auc- 
tion prices.  We  must  never  forget  that  business 
keeps  moving,  and  under  normal  conditions  previous 
expectations  are  realized.  Banks  expect  to  hold  their 
bonds  until  paid  in  full  at  maturity.  The  fairest  price 
at  which  to  make  this  inventory  is  the  cost  price  adjusted 
to  the  present  time;  that  is  to  say,  if  a  bond  cost  110 
five  years  ago  and  will  be  paid  five  years  hence,  one  half 
of  the  premium  should  have  been  absorbed  at  this 
time,  and  105  would  be  a  fair  appraisal  value;  but  if  it 
cost  90,  it  would  be  a  proper  figure  to  hold  it  at  95. 
Bond  investments  differ  from  merchandise  in  that 
the  former  has  a  certainty  of  payment  that  merchandise 
does  not  possess  as  to  sale. 

Of  course,  if  the  bond  buying  is  without  knowledge 
of  securities,  and  with  ill  advice,  the  quality  of  the 
holdings  may  negative  all  that  has  been  said  above, 
but  we  assume  that  the  bank  man  knows  quality  in 
bonds  as  the  merchant  knows  quaUty  in  merchandise. 

Banking  House. 

This  item  in  the  balance  sheet  is  the  book  value  of  the 
banking  house.  No  bank  is  ever  allowed  to  purchase 
real  estate  as  an  investment.     They  are,  however,  in 


HOW  TO  READ  A  BANK  STATEMENT  181 

all  jurisdictions  allowed  to  build  or  buy  a  banking  house, 
renting  the  unused  portion.  Permission  to  do  this  must 
be  obtained  from  the  authorities  and  the  amount  in- 
vested therein  is  usually  passed  upon  by  the  supervis- 
ing officials.  This  is  often  ''charged  off"  or  charged 
down  to  a  nominal  value,  inasmuch  as  banking  struc- 
tures as  such  have  a  limited  utility. 

Real  Estate  Owned. 

While  a  bank  may  not  invest  in  real  estate,  other 
than  its  banking  house,  it  may  take  over  real  estate 
for  debts  previously  contracted.  In  fact  a  bank  may 
do  anything  to  save  itself  from  loss  from  preexisting 
debts,  even  though  the  act  would  in  itself  otherwise  be 
unlawful.  Such  real  estate  as  is  taken  over  is  held  as 
an  asset,  rented  until  sold  and  the  profit  or  loss  (usually 
the  latter)  adjusted.  Such  holdings  can  be  held  for  a 
stated  period,  usually  five  years,  when  an  extension  of 
time  to  sell  must  be  obtained. 

Land  Contracts. 

This  represents  the  amount  of  real  estate  sold  under 
contract  for  which  deed  has  not  been  given.  Title 
has  not  passed  out  of  the  bank  as  yet  and  payments  are 
constantly  being  made  on  these  accounts.  This  form 
of  accounting  is  pursued  in  order  to  separate  the  prop- 
erty sold  from  that  still  unliquidated. 

Mortgages  Owned. 

This  is  a  state  bank  and  is  allowed  to  make  loans  on 
real  estate  secured  by  first  mortgage.  National  banks 
were  not  allowed  to  make  mortgage  loans  until  the 
passage  of  the  Federal  Reserve  Act.  They  are  now, 
except  in  the  large  cities,  permitted  to  make  such  loans 
under  certain  conditions.  These  conditions  are  that 
the  land  shall  be  farm  land,  within  one  hundred  miles  of 


182  THE  BUSINESS  MAN  AND  HIS  BANK 

the  bank,  and  the  amount  loaned  not  over  fifty  per  cent 
of  the  value,  for  a  term  of  not  over  five  years,  and  for 
not  over  one  year  on  city  property.  This  figure  is  the 
amount  loaned  on  real  estate  security. 

Loans  and  Discounts  Secured  by  Bond  and  Mortgage, 

Deed  or  other  Real  Estate  Collateral. 

It  is  the  intention  in  New  York  to  keep  the  banks 
free  from  real  estate  collateral  loans  as  much  as  pos- 
sible, such  loans  as  are  made  on  real  estate  to  be  in  the 
form  of  first  mortgages. 

It  frequently  happens  that  the  owner  of  a  mortgage 
will  want  to  borrow  for  a  short  time  on  the  security  of 
his  mortgage,  and  such  loans  are  regarded  as  equivalent 
to  a  real  estate  mortgage;  and  if  the  mortgage  is  a  first 
lien  upon  good  property,  it  is  favorably  regarded  in 
banking  circles.  In  real  estate  booms,  banks  have  been 
over  optimistic  in  this  respect,  and  have  taken  second 
mortgages  as  security,  to  their  sorrow.  The  New  York 
State  Banking  Department  holds  that  the  place  for  realty 
loans  is  the  savings  banks,  and  does  not  favor  mortgage 
loans  for  commercial  banks.  This  item  is  for  the  pur- 
pose of  checking  the  banks  in  this  respect. 

Frequently  deeds  are  offered  as  security;  but  the  only 
proper  way  is  to  make  the  loan  upon  mortgage  security, 
with  the  papers  properly  recorded.  If  a  deed  were  taken 
as  security,  it  would  be  regarded  as  a  mortgage  and  not 
an  absolute  transfer  of  the  premises.  Well  managed 
banks  will  not  accept  deeds  under  any  condition. 

Loans  and  Discounts  Secured  by  other  Collateral. 

This  includes  the  collateral  loans  of  all  kinds,  other 
than  on  real  estate  security,  such  as  Liberty  Bonds, 
stocks  and  bonds  listed  on  the  stock  exchanges,  and 
unlisted  securities.  They  are  often  called  ''demand" 
or  ''secured"  loans. 


HOW  TO  READ  A  BANK  STATEMENT  183 

Loans,  Discounts  and  Bills  Purchased,  not  Secured  by 

Collateral. 

These  are  loans  represented  by  promissory  notes. 
The  ''discounts"  are  notes  held  by  customers  and  dis- 
counted for  their  account.  The  "bills  purchased"  are 
commercial  paper  purchased  in  the  open  market  as 
treated  under  the  head  of  Commercial  Paper  page  146. 

Overdrafts. 

An  overdraft  being  "sl  loan  without  security"  must 
be  set  up  in  the  statement  to  show,  first,  that  such  items 
exist  and  to  what  extent,  and  secondly,  to  get  them  in 
the  assets,  which  they  properly  are.  Being  a  debt 
due  to  the  bank,  they  must  be  listed  among  the  assets 
just  as  any  other  obligation  would  be. 

Overdrafts  are  frowned  upon  in  all  banks.  They  in- 
dicate one  of  two  things:  first,  carelessness  on  the 
part  of  the  depositor.  In  many  instances  the  depositor 
gets  confused  as  to  his  bank  balance  and  overdraws  un- 
consciously. Second,  the  result  of  working  on  too  small 
a  margin,  and  drawing  checks  faster  than  deposits  war- 
rant. In  the  national  banks  the  allowing  of  overdrafts 
is  forbidden,  and  in  all  cases  the  practice  is  discouraged. 

Due  from  Reserve  Agents  (or  legal  depositories). 

By  law  all  banks  are  required  to  carry  a  certain 
portion  of  their  deposits  in  cash,  or  with  other  banks 
(called  reserve  agents).  These  sums  they  may  con- 
sider in  the  same  class  as  cash  on  hand.  The  ratio 
varies  in  different  communities.  In  New  York  City 
banks  must  keep  13  per  cent  of  their  demand  deposits 
and  3  per  cent  of  their  time  deposits  in  reserve.  The 
reserve  must  be  kept  in  the  Federal  Reserve  Banks,  if 
the  bank  is  a  member.  In  cities  such  as  Albany,  Buf- 
falo, etc.,  the  ratio  is  10  and  3,  respectively,  elsewhere, 
7  and  3.     The  cash  on  hand  is  now  optional  in  national 


184  THE  BUSINESS  MAN  AND  HIS  BANK 

banks,  the  legal  reserve  being  held  by  the  Federal  Re- 
serve Banks.  In  state  mstitutions  the  reserve  must 
be  kept  in  lawfully  appointed  reserve  banks  and  on  hand 
and  the  ratio  is  slightly  different. 

Before  a  bank  can  qualify  as  a  depository  it  must  be 
voted  upon  by  the  board  of  directors  and  approved  by 
the  Superintendent  of  Banks.  Under  the  former  regime, 
in  national  banks  the  consent  of  the  Comptroller  of  the 
Currency  had  to  be  secured.  Funds  so  held  are  listed 
separately  and  reported  as  ''due  from  reserve  agents." 

Due  from  Trust  Companies,  etc. 

These  are  balances  due  from  banks  other  than  reserve 
agents.  They  are  created  by  sending  items  to  such 
banks  for  collection.  Since  these  balances  cannot  be 
counted  in  the  reserve  they  are  separated;  otherwise 
they  are  of  the  same  nature  as  reserve  balances. 

Specie  and  Currency. 

This  is  the  silver  and  bills  in  the  bank's  vault.  In 
this  bank,  with  deposits  running  over  five  million 
dollars  a  month,  it  is  found  that  $200,000  is  enough  cash 
to  keep  on  hand,  the  inflow  being  more  or  less  steady. 
In  fact  the  cash  accumulates  faster  than  it  can  be  used 
for  local  purposes  and  the  surplus  is  shipped  to  the 
New  York  correspondent  for  credit.  In  the  event  that 
the  bank  should  need  cash  in  unusual  quantities,  it 
would  draw  on  its  New  York  bank  for  cash  shipments. 
This  failing,  it  would  either  secure  a  loan  on  its  bonds, 
or  rediscount  its  paper.  Under  the  Federal  Reserve 
Act,  the  latter  would  undoubtedly  be  the  course  pur- 
sued. As  a  matter  of  fact  this  bank  finds  that  with 
deposits  of  over  six  million  it  can  safely  operate  with 
$400,000,  part  on  hand  and  part  in  New  York  banks, 
sustaining  the  theory  that  one  dollar  in  money  will 
support  four  or  more  dollars  of  credit. 


HOW  TO  READ  A  BANK  STATEMENT  185 

Exchanges  and  Checks  for  Next  Days  Clearings. 

These  are  the  checks  received  during  the  day  and 
drawn  on  banks  that  clear  through  the  Clearing  House 
and  will  be  paid  the  next  day.  They  are  regarded  as 
equivalent  to  cash.  In  this  case  they  are  checks  on 
neighboring  banks  received  after  the  bank  has  made 
its  daily  exchange  of  items,  and  will  be  paid  the  next 
day. 

In  the  New  York  banks  this  is  a  very  heavy  item, 
running  into  the  milhons  in  most  of  these  large  insti- 
tutions. 

War  Savings  Stamps  are  those  carried  by  the  bank 
for  sale  to  customers. 

Furniture  and  Fixtures. 

This  is  the  investment  in  desks,  adding  machines, 
typewriters,  safes,  etc.  The  proper  way  is  to  charge  this 
account  off  from  time  to  time,  so  that  as  the  equipment 
wears  out  it  will  show  a  lesser  valuation  on  the  bank 
records. 

Accrued  Interest. 

This  is  interest  not  yet  due  but  ''accrued."  That  is 
to  say,  interest  that  cannot  be  collected  because  not 
yet  due.  Take  a  simple  illustration.  The  bank  holds 
$10,000  of  certain  bonds,  interest  due  February  1st 
and  August  1st.  This  report  is  made  as  of  January  1st. 
There  is  up  to  this  time  $240  of  interest  due  on  this 
investment  but  not  collectable  until  February  1st. 
Likewise  the  interest  on  demand  notes,  which  is  collected 
at  stated  times  during  the  year.  The  amount  so  due  is 
computed  on  each  item  and  forms  part  of  this  accrued 
interest.  In  short,  this  represents  all  the  interest 
that  the  bank  has  due  to  it  up  to  the  time  and  not  col- 
lected because  not  yet  due,  together  with  interest  past 


186  THE  BUSINESS  MAN  AND  HIS  BANK 

due  but  which  is  considered  good.  It  is  often  an  im- 
portant item  inasmuch  as  it  represents  hidden  yet  real 
assets  that  properly  belong  in  the  statement,  and  yet 
are  not  shown  by  the  books,  which  do  not  show  such 
accruals  from  day  to  day. 

Customers  Liability  on  Account  of  Acceptances. 

This  is  a  new  item  not  found  in  all  statements,  but 
generally  obtains  in  the  case  of  large  city  banks  that 
are  making  acceptances. 

When  a  bank  makes  an  acceptance  for  a  customer  it 
takes  some  form  of  security,  or  obligation,  to  assure 
the  payment  of  the  debt.  It  may  be  the  promissory 
note  of  the  customer,  an  agreement,  or  collateral  in  one 
form  or  another;  but  the  obligation  which  the  bank 
has  assumed  is  safeguarded  to  itself  and  appears  in 
this  item. 

Liabilities 

Capital  Stock. 

This  is  the  working  capital  of  the  bank,  contributed 
by  the  stockholders.  In  addition,  they  are  liable  to 
an  assessment  equal  to  the  face  value  of  their  stock 
in  case  the  bank  fails.  WTiile  the  profit  in  banking 
comes  from  a  small  capital  and  a  large  line  of  deposits, 
so  that  the  earnings  of  several  dollars  of  deposits  will 
accrue  to  the  benefit  of  one  dollar  of  capital,  there  is 
added  protection  to  the  depositors  in  a  large  capital. 
Moreover  it  gives  the  bank  additional  lending  power. 
Inasmuch  as  the  law  hmits  the  loans  a  bank  may  make 
to  a  proportion  of  its  capital  and  surplus,  the  bank 
with  a  small  capital  finds  itself  handicapped  in  handhng 
the  affairs  of  large  concerns.  There  is  no  rule  in  this 
respect,  except  the  legal  rule,  which  stipulates  the 
capital  required,  which  is  graded  according  to  population. 


HOW  TO  READ  A   BANK  STATEMENT  187 

Surplus  Fund. 

This  is  the  fixed  surpkis.  When  a  bank  is  organized 
the  stockholders  contribute  to  the  surplus  fund,  so  that 
it  starts  off  with  a  certain  amount  of  surplus  as  an  added 
protection  to  the  depositors.  If  the  stock  is  sold  at 
$120  per  share,  $100  would  be  placed  in  the  capital 
stock  fund  and  $20  in  the  surplus  fund.  This  fund  is 
increased  from  time  to  time  from  profits,  so  that  in  some 
cases  it  far  exceeds  the  capital,  and  makes  the  stock  the 
more  valuable.  For  instance,  a  bank  on  Long  Island 
has  a  capital  of  but  $30,000;  but  the  surplus  fund  is 
$250,000,  created  largely  from  profits,  thus  making  the 
stock  very  valuable  and  closely  held. 

This  item  marks  the  management,  for  it  can  only 
increase  as  profits  are  made,  and  profits  arise  from  sound 
policies.  Follow  this  item  in  bank  statements  carefully 
from  time  to  time,  as  well  as  the  next. 

Undivided  Profits. 

This  is  the  undistributed  profits.  As  the  books  are 
closed  from  time  to  time,  usually  every  six  months,  the 
profits  are  carried  to  undivided  profits,  and  out  of  this 
fund  dividends  are  declared.  As  the  undivided  profits 
grow,  additions  are  made  to  the  fixed  surplus  which 
is  rarely  changed  except  by  additions.  Undivided 
profits  accounts  is  the  profit  and  loss  account  of  the  bank, 
and  shows  the  current  earnings.  This  item  and  the 
surplus  should  be  considered  together.  If  losses  are 
taken  they  are  charged  to  this  fund  and  a  decrease  in  the 
undivided  profits  usually  indicates  that  the  bank  has 
charged  off  bad  debts,  or  "marked  down"  its  bonds. 
Banks  usually  exhaust  all  legal  means  before  charging 
off  a  note.  Often  they  are  then  carried  in  "suspense 
account"  as  one  dollar  and  many  are  afterward  paid, 
which  of  course  is  in  substance  a  clear  profit. 


188  THE  BUSINESS  MAN  AND  HIS  BANK 

Deposits. 

These  are  generally  classified  to  show  the  various 
kinds  of  deposits.     In  this  case  we  have: 

1.  Deposits  by  the  State  of  New  York.  These  are 
public  moneys  deposited  by  the  state  authorities,  and 
are  usually  secured  by  a  pledge  of  state  bonds  as  col- 
lateral. In  other  words,  before  the  state  will  deposit 
with  a  bank,  the  latter  must  buy  state  bonds,  lodge 
them  with  the  State  Comptroller  or  Treasurer,  who  in 
turn  will  deposit  with  the  bank.  The  same  is  true  of 
United  States  deposits. 

2.  Postal  Savings  Deposits.  This  is  of  the  same 
nature  as  state  deposits.  The  local  post  office  is  authoriz- 
ed to  deposit  the  postal  savings  deposits  with  local 
banks  that  qualify  as  depositories.  To  do  so  the  bank 
must  buy  certain  bonds  (government,  state,  and  munici- 
pal bonds)  and  when  these  have  been  deposited  with  the 
Postal  Savings  Commissioners  in  Washington,  postal 
funds  may  be  deposited  up  to  certain  limits.  The 
securities  are  of  course  the  property  of  the  bank  and 
interest  is  collected  by  the  bank;  but  in  case  of  failure, 
the  Government  would  be  reimbursed  from  the  proceeds 
of  the  bonds  and  the  balance  returned  to  the  bank  for 
liquidation  purposes. 

3.  Deposits  subject  to  check.  These  are  the  demand 
deposits,  subject  to  the  checks  of  the  depositors.  They 
are  always  shown  separately.  Interest  may  be  paid  on 
these  deposits  on  daily  balances,  but  they  are  payable  as 
the  name  indicates,  on  demand. 

4.  Demand  certificates  of  deposit.  Instead  of  issuing 
a  pass  book  for  interest  bearing  accounts  many  banks 
issue  a  ''certificate  of  deposit"  which  is,  as  its  name 
implies,  a  certificate  that  the  one  mentioned  has  deposi- 
ted a  certain  amount,  payable  on  demand  or  at  a  certain 
time,  with  or  without  interest.     ''Time  certificates  of 


HOW  TO  READ  A  BANK  STATEMENT  189 

deposit"  are  of  the  same  nature,  but  are  payable  only 
at  a  stipulated  time. 

5.  Deposits  payable  only  on  presentation  of  pass 
books.  These  are  savings  deposits,  precisely  the  same 
as  savings  bank  deposits.  They  are  represented  by  pass 
books,  and  such  deposits  are  subject  to  notice  of  with- 
drawal as  a  matter  of  protection  to  the  bank.  The  law 
usually  requires  a  less  reserve  against  such  deposits  on 
account  of  their  nature,  the  time  notice  being  a  safeguard, 
and  the  character  of  the  deposits  such  that  the  bank 
would  not  as  a  matter  of  practice  be  required  to  pay 
on  demand.  The  law  recognizes  the  fact  that  such 
depositors  would  not  all  withdraw  their  funds  at  the 
same  time,  and  so  permits  their  closer  investment  than 
the  demand  deposits.  In  some  states  these  deposits 
are ''segregated"^ — that  is,  invested  separately  in  recogniz- 
ed savings  bank  investments  and  considered  apart 
from  the  general  assets  of  the  bank. 

6.  Cashier's  checks.  These  are  the  checks  of  the 
cashier  or  other  officers,  given  for  various  purposes.  In 
paying  the  expenses  of  the  bank,  or  in  issuing  the  bank's 
own  checks,  this  form  is  used.  A  draft  on  the  bank's 
city  correspondent  would  answer  the  same  purpose, 
but  inasmuch  as  the  cashier's  check  is  the  bank's  order 
on  itself,  it  is  considered  an  obligation  until  paid.  If 
a  New  York  draft  were  drawn,  for  instance,  to  pay  for 
a  block  of  bonds,  it  would  be  charged  against  the  New 
York  account;  but  if  a  cashier's  check  were  issued  it 
would  still  be  an  obligation  of  the  bank  until  cancelled 
by  payment  in  another  form.  In  short,  the  bank  pays 
its  debt  and  ow^es  it  too. 

7.  Certified  checks.  When  a  check  is  certified  it  is 
immediately  charged  to  the  maker,  and  "certified  check 
account"  is  credited  to  keep  the  books  in  balance. 
When  it  is  paid,  the  certified  check  account  is  charged 


190  THE  BUSINESS  MAN  AND  HIS  BANK 

and  the  record  is  closed.  This  item  shows  how  much 
the  bank  has  outstanding  in  certified  checks;  and  these 
being  its  own  obhgation  must  be  shown  to  indicate  the 
Habihty  in  this  direction.  To  repeat,  a  certified  check 
is  not  the  obhgation  of  the  maker,  but  of  the  bank,  and 
must  be  so  shown  in  the  statement. 

Due  Banks  and  Trust  Companies. 

Many  banks  have  '^collection  accounts" — that  is 
to  say,  accounts  with  one  another.  Checks  are  sent 
to  one  another  for  collection  and  are  credited  the 
bank  sending  them  and  paid  for  as  agreed  upon,  once 
a  week  or  semi-monthh',  and  the  amount  is  carried  as 
''amount  due  banks  and  trust  companies." 

Banks  Liability  on  Account  of  Acceptances. 

This  is  the  offsetting  item  to  ' '  Customers  liability  on  ac- 
count of  acceptances."  The  two  items  are  usually  in  the 
same  amount,  the  one  balancing  the  other.  When  a  bank 
makes  an  acceptance,  it  incurs  an  obligation.  It  must 
stand  ready  to  meet  the  obligation,  even  though  its 
customer  does  not  make  good  to  it ;  therefore  it  sets  up  a 
liability  in  the  amount  assumed  to  show  how  much  of 
such  instruments  it  has  accepted,  or  agreed  to  pay  when 
due. 

Bills  Payable. 

At  times  banks  find  they  have  over  invested  in  bonds 
''or  over  loaned," — meaning  they  have  made  loans  to  such 
an  extent  that  they  find  themselves  short  of  money  on 
account  of  unexpected  withdrawals,  and  must  therefore, 
replenish  their  reserve  accounts.  They  might  sell  bonds, 
or  call  in  loans,  but  the  former  might  entail  loss  to  the 
bank  and  the  latter  might  work  hardship  to  the  borrow- 
ers.    To  overcome  these  objections,   they  may  redis- 


HOW  TO  READ  A  BANK  STATEMENT  191 

count  some  of  their  promissory- notes  with  other  banks, 
or  borrow  on  their  bond  holdings.  Both  processes  may 
be  profitable,  for  in  rediscounting,  it  is  often  possible 
to  do  so  at  a  lesser  rate  than  the  loans  carry,  and  loans 
may  be  obtained  on  good  securities  at  a  less  rate  than 
the  bank  receives  from  it  customers.  For  instance,  a 
bank  needs  $100,000  to  make  good  its  reserve.  It  holds 
$100,000  of  choice  commercial  paper  drawing  53^^  per 
cent.  It  may  rediscount  this  at  the  Federal  Reserve 
Bank  at  43-2  pei"  cent,  leaving  a  profit  of  1  per  cent,  to 
itself.  Or,  it  may  borrow  on  Liberty  Bonds  at  the  same 
rate,  thus  leaving  its  assets  intact  but  partly  pledged, 
and  creating  an  obligation  as  indicated  in  this  title. 
As  loans  are  paid,  securities  mature,  or  deposits  increase, 
funds  will  be  in  hand  to  pay  off  this  obligation,  leaving 
the  assets  undisturbed.  This  practice  has  become 
quite  common  during  the  past  few  years,  especially  since 
the  advent  of  the  Federal  Reserve  banks,  and  this  item 
may  now  be  found  in  a  great  many  statements. 

Reserves  for  Taxes,  etc. 

It  is  the  custom  among  banks  and  business  houses  to 
set  aside  from  time  to  time  an  amount  sufficient  to  cover 
fixed  charges  that  have  accrued  but  are  not  yet  due. 
Taxes  which  accumulate  constantly,  including  real  es- 
tate, income,  profits  tax,  etc.  should  be  provided  for  by 
holding  out  a  sum  sufficient  to  cover  them  to  the  date 
of  the  statement.  Otherwise  the  earnings  will  be  in- 
flated, and  the  true  condition  will  not  be  shown.  This 
item  is  of  the  same  nature  as  accrued  interest  to  deposi- 
tors. The  bank  estimates  that  $15,000  will  cover  these 
charges  and  has  properly  set  up  a  reserve  to  cover  them. 
If  this  were  not  done  the  profits  would  be  that  much 
greater,  and  the  statement  would  not  reflect  the  real 
condition  of  the  bank  at  this  time. 


192  THE  BUSINESS  MAN  AND  HIS  BANK 

Interest  Accrued  to  Depositors. 

All  banks  pay  interest  to  depositors  and  the  charge 
is  running  all  the  time.  Credit  is  made  at  stated  times 
during  the  year,  but  until  the  interest  is  calculated  it 
cannot  be  credited.  Let  us  assume  that  the  bank 
under  review  has  a  million  of  deposits  on  which  it  will 
pay  interest  at  4  per  cent,  on  February  1st.  At  the 
time  this  statement  was  made  there  was  five  month's 
interest  ''accrued."  but  not  yet  due,  and  we  deceive 
ourselves  if  we  do  not  figure  accordingly.  While  it 
does  not  become  due  until  a  month  hence,  it  is  never- 
theless running  against  the  bank  every  day,  and  so  we 
compute  five  months  interest  on  a  million  dollars  at 
4  per  cent,  yearly,  and  enter  this  as  a  liabihty. 

Unearned  Discount. 

When  a  bank  discounts  a  note  it  takes  out  the  interest 
in  advance  and  immediately  credits  the  amount  to  income 
account.  It  is  obvious  that  it  has  taken  profits  or  earn- 
ings in  advance.  It  has  anticipated  time  and  "drawn 
its  pay"  in  advance.  For  instance,  here  is  a  note,  for 
$1,000  dated  October  1st  for  six  months  at  6  per  cent. 
The  bank  discounted  the  note  on  the  same  date  and 
deducted  $30  as  the  discount  and  carried  the  same  to 
income  as  an  immediate  earning.  This  statement  was 
taken  as  of  January  1st,  1920.  It  is  obvious  that  only 
half  of  the  $30  had  been  earned  up  to  that  time.  There- 
fore we  must  take  out  of  our  profit  and  loss  account 
the  $15  to  get  a  correct  statement  of  condition  as  of 
that  date.  We  do  this  by  setting  up  as  a  Hability  the 
total  of  these  various  amounts  and  call  it  "unearned 
discount,"  or  "interest  received  but  not  earned."  It 
has  its  counterpart  on  the  other  side  of  the  statement 
in  the  item  "accrued  interest." 


CHAPTER  XXII 
ACCEPTANCES   AND   THEIR  USES 

Before  discussing  acceptances,  their  uses  and  what  the 
introduction  of  these  instruments  is  intended  to  accom- 
pUsh  in  American  banking  and  business  circles,  let  us 
get  clearly  in  mind  what  an  acceptance  is.  An  accept- 
ance is  nothing  more  than  an  ''accepted"  bill  of 
exchange.  If  the  latter  instrument  is  understood  as  to 
its  underlying  principles,  the  acceptance,  which  grows 
out  of  a  bill  of  exchange,  will  likewise  easily  be  compre- 
hended. 

A  bill  of  exchange  is  an  unconditional  order  in  writing, 
addressed  by  one  party  to  another,  signed  by  the  one 
drawing  the  bill,  requiring  the  party  to  whom  it  is 
addressed  to  pay  on  demand  or  at  a  fixed  or  determinable 
future  time  a  sum  certain  in  money,  to  or  to  the  order  of 
a  specified  party,  or  to  bearer. 

The  Purpose  of  Bills  of  Exchange. 

The  purpose  of  the  bill  of  exchange  is  now,  and  always 
has  been,  since  its  introduction  centuries  ago,  to  transfer 
funds  by  giving  an  order  on  the  debtor  to  pay  the  sum 
stated  to  another,  the  bill  being  his  warrant  for  doing  so. 
Thus,  A  holds  funds  belonging  to  B,  or  is  otherwise  in 
debt  to  B.  B  draws  an  order  on  A  to  pay  the  amount 
to  C.  This  order  is  a  bill  of  exchange,  and  would  prop- 
erly be  called  a  "finance  bill,"  since  it  simply  transfers 
money  and  does  not  arise  out  of  a  sale  of  goods.  If, 
however,  B  were  to  sell  a  bill  of  goods  to  A,  and  ship 

13  193 


194  THE  BUSINESS  MAN  AND  HIS  BANK 

them  under  a  bill  of  exchange  or  draft  drawn  upon  A, 
requu-ing  him  to  pay  the  bill  before  obtaining  possession 
of  the  goods,  we  would  have  a  commercial  bill  of  ex- 
change, or  commercial  draft. 

The  bank  check  responds  to  the  definition  of  a  bill  of 
exchange  inasmuch  as  it  is  an  order  on  a  bank  to  pay 
a  sum  certain  in  money  to  a  designated  party  or  to 
bearer  on  demand,  and  these  instruments  have  always 
been  regarded,  and  truly  enough  as  bills  of  exchange 
by  the  text  writers.  There  has,  however,  developed  a 
branch  of  the  law  and  numerous  cases  that  are  peculiar 
to  bank  checks,  and  in  this  respect  they  may  be  con- 
sidered as  a  special  type  of  bill  that  has  had  a  develop- 
ment coexistent  with  the  development  of  banking, 
particularly  in  those  countries  where  the  bank  check 
has  had  its  largest  growth,  namely  the  United  States, 
Canada  and  England. 

The  most  common  use  of  the  bill  of  exchange  is  to 
accompany  a  shipment  of  goods,  requiring  the  buyer 
either  to  pay  for  them,  or  to  execute  a  promise  to  pay 
by  ''accepting"  the  bill  before  possession  of  the  goods 
may  be  obtained.  In  such  cases  the  bill  of  exchange  is 
usually  accompanied  by  a  bill  of  lading,  which,  being 
necessary  in  order  to  obtain  the  goods  from  the  carrier, 
can  only  be  had  by  paying  or  accepting  the  bill.  There- 
fore an  ''acceptance"  is  merely  a  bill  of  exchange 
accepted;  but  on  being  accepted,  it  loses  its  character 
as  an  order  and  becomes  a  promise.  It  is  then  equivalent 
to  a  promissory  note. 

Practical  Use  of  a  Bill  of  Exchange. 

Let  us  take  a  simple,  yet  common,  example  of  the 
practical  use  of  the  bill  of  exchange  in  a  domestic  trans- 
action, showing  also  the  use  of  the  bill  of  lading  in  a 
sale  for  cash  on  delivery.     (As  a  matter  of  fact,  such 


ACCEPTANCES  AND  THEIR  USES  195 

transactions  are  merely  "  C.  O.  D."  transactions  with 
a  little  dignity  added). 

The  A.  B.  C.  Wagon  company  in  New  York  has  sold 
a  wagon  to  a  farmer  in  New  Jersey.  He  is  not  known 
to  the  firm  and  upon  checking  him  up  they  find  him  to 
be  slow  pay,  and  decide  upon  a  cash  transaction.  The 
wagon  is  shipped  to  his  railroad  station.  The  bill  of 
lading  issued  by  the  railroad  is  an  ''order  bill,"  drawn 
to  the  order  of  the  wagon  company  and  requires  its 
indorsement  before  the  goods  can  be  dehvered.  In 
other  words  the  title  to  the  wagon  never  leaves  the  com- 
pany. The  company  draws  a  sight,  or  demand,  draft 
on  the  buyer,  attaches  the  bill  of  lading  and  sends  the 
two  documents  to  the  farmer's  bank  for  collection. 
The  instructions  to  the  bank  are  to  dehver  the  bill  of 
lading  (which  has  been  duly  indorsed)  to  the  farmer 
upon  payment  of  the  amount  of  the  draft.  On  the 
arrival  of  the  wagon  at  the  railroad  station,  the  agent 
notifies  the  farmer  that  the  wagon  has  arrived.  The 
bank,  upon  receiving  the  draft  will  also  notify  him  that 
the  draft  is  at  hand,  with  bill  of  lading  attached.  (In 
referring  to  bills  of  lading,  the  initials  ''B.  L. "  are  gener- 
ally used).  When  the  farmer  pays  the  amount  to  the 
bank  he  can  get  the  bill  of  lading  and  with  it,  the  wagon. 
If  he  does  not  take  up  the  draft  he  cannot  obtain  the 
wagon  and  the  company  may  take  it  back  without 
ceremony,  it  still  being  their  property. 

This  is  the  most  common  use  of  the  bill  of  exchange 
in  this  country  and  is  used  daily  in  thousands  of  trans- 
actions involving  the  sale  of  goods;  but  inasmuch  as 
funds  belonging  to  others  are  as  a  rule  held  by  banks, 
bills  for  the  transfer  of  money  usually  take  the  form 
of  bank  checks,  and  when  drawn  by  banks  upon  their 
correspondents  are  called  ''bankers  bills"  or  "bankers 
drafts." 


196  THE  BUSINESS  MAN  AND  HIS  BANK 

Present  Day  Financing  Methods. 

If  the  foregoing  is  clearly  understood,  we  are  prepared 
to  discuss  the  acceptance  as  it  is  an  outgrowth  of  the 
wagon  illustration,  and  see  how  it  is  intended  to  im- 
prove business  and  banking  transactions  and  customs 
in  this  country. 

Prior  to  the  Civil  War  it  was  the  custom  of  merchants 
to  make  periodical  visits  to  trading  centres  and  to 
purchase  goods  for  several  months  in  advance,  giving 
in  payment,  their  promissory  notes,  which  the  seller 
discounted  at  his  bank,  or  held  until  maturity  if  his  means 
permitted.  Owing  to  the  disordered  condition  of  the 
finances  of  the  country,  and  the  fluctuating  value  of  the 
currency,  the  amount  which  the  seller  actually  received 
when  the  notes  were  paid  often  proved  less  than  was 
contemplated,  thus  reducing  the  profits.  This  un- 
certainty of  course  had  to  be  duly  considered  and  the 
prices  arranged  accordingly.  In  order  to  overcome  this 
condition,  a  custom  arose  of  offering  the  buyer  a  cer- 
tain discount  from  the  face  of  the  invoice  if  payment 
was  made  in  cash  within  a  stipulated  time. 

This  arrangement  rapidly  grew  in  favor  and  the  custom 
of  cash  discounts  has  become  a  fixed  element  in  American 
merchandising  methods.  But  in  order  to  avail  him- 
self of  these  concessions,  the  buyer  had  to  have  cash 
funds,  and  there  arose  another  custom,  namely,  the 
seUing  of  promissory  notes  through  commercial  paper 
brokers,  as  fully  treated  under  the  subject  ''Commercial 
Paper,"  page  146. 

Out  of  this  process  there  has  developed  what  is  now 
the  common  and  most  widely  used  form  of  credit  in 
this  country,  the  open  account,  or  book  credit.  This  sim- 
ply means  that  the  seller  opens  account  with  the  buyer 
and  "charges"  the  amount.  The  goods  are  sold  on 
agreed  terms  of  payment  running  from  a  few  days  to 


ACCEPTANCES  AND  THEIR  USES  197 

six  months,  with  cash  discounts  if  payment  is  made 
within  certain  prescribed  times,  as  2  per  cent,  for  pay- 
ment within  ten  days,  one  per  cent,  for  payment  within 
thirty  days,  or  the  face  amount  of  the  invoice  if  not 
paid  until  the  end  of  the  credit  period,  say,  sixty  days. 
These  terms  would  be  expressed  as  "3^io,  Ho,  iiet  60." 

This  form  of  credit  requires  that  the  seller  be  finan- 
cially strong  enough  to  carry  the  buyer  on  his  books 
until  payment  is  made,  and  the  accounts  so  opened  are 
called  ''accounts  receivable"  or  simply  "receivables." 
The  giving  of  promissory  notes  by  the  buyer  now  obtains 
in  but  few  of  the  lines  of  merchandising,  and  is  relatively 
rare,  the  open  account  predominating  to  a  very  large 
degree. 

The  Disadvantages  of  the  Open  Account. 

The  disadvantages  of  the  open  account  form  of  credit 
are  many  and  are  easily  recognized.  First,  credit  in 
the  form  of  open  accounts  is  cash,  tied  up  and  prac- 
tically unavailable  as  long  as  the  credit  is  unliquidated; 
that  is  to  say,  the  seller  cannot  easily  use  this  form  of 
credit  for  borrowing  purposes.  (See  hypothecating 
accounts  receivable,  page  165).  In  making  up  financial 
or  credit  statements,  these  open  accounts  are  always 
listed  as  "  accounts  receivable "  and  constitute  one 
of  the  four  quick  assets  of  the  business,  inasmuch  as 
they  are  constantly  turning  into  cash.  If  the  credit 
methods  of  the  concern  are  sound,  they  are  regarded  as 
next  to  cash  as  a  quick  asset,  but  to  dispose  of  them  in 
any  way,  as  by  hypothecating  these  receivables,  is 
regarded  as  a  sign  of  weakness  and  impau-ing  the  stand- 
ing of  the  concern. 

Realizing  the  intrinsic  goodness  of  these  receivables 
there  have  been  organized  during  the  past  few  years 


198  THE  BUSINESS  MAN  AND  HIS  BANK 

several  large  and  prosperous  concerns  that  make  a 
business  of  lending  against  these  accounts,  or  in  other 
words,  buying  the  accounts,  thus  anticipating  their  pay- 
ment. Some  banks  will  lend  upon  the  assignment  of 
receivables,  but  this  form  of  borrowing  is  not  favored 
by  the  banking  fraternity,  inasmuch  as  it  weakens 
the  borrower's  condition  because  it  takes  away  one  of 
his  most  liquid  assets. 

The  second  disadvantage  of  the  open  account  is  that 
it  has  no  fixed  time  of  payment.  Even  though  the 
credit  terms  be  distinctly  stated,  and  agreed  upon,  a 
lapse  of  a  few  days  in  remitting  is  no  serious  matter, 
because  the  credit  is  open. 

In  an  investigation  covering  the  hardware  line,  the 
following  results  were  shown.  Among  manufacturers 
the  terms  are  usually  60  days,  less  2  per  cent,  ten  days. 
Those  paying  within  the  ten  day  period  average  15 
days  before  settlement  was  finally  effected,  and  those 
taking  the  full  credit  term  settled  in  from  75  to  80  days. 
Ten  per  cent  of  the  customers  took  90  days — an  obvious 
extension  of  the  credit  term  over  the  agreed  time. 
From  40  to  50  per  cent,  of  the  jobbers  took  15  days  for 
settlement,  while  of  those  who  took  the  60  day  option 
only  30  per  cent,  settled  promptly.  Of  the  remaining 
20  per  cent,  only  about  one-half  pay  in  the  period  be- 
tween 3  and  4  months  after  purchase,  while  the  other 
half  pay  in  from  four  to  six  months,  or  never,  notwith- 
standing the  terms  of  sale,  were  60  days.  (Pamphlet 
on  Acceptances  issued  by  the  New  York  Federal  Re- 
serve Bank). 

The  third  disadvantage  of  the  open  account  is  that 
its  collection  is  retarded  by  the  fact  that  payment  may 
be  delayed  as  above  indicated  without  seriously  im- 
pairing the  credit  of  the  debtor,  and  suit  must  be  brought 
to  recover  for  goods  sold  and  delivered,  which  is  sub- 


ACCEPTANCES  AND  THEIR  USES  ,  199 

ject  to  proof  of  delivery,  terms,  etc.,  and  is  open  to 
dispute  as  to  the  quality  and  quantity,  all  of  which 
is  time  consuming  and  costly. 

When  the  buyer  fails  to  pay  for  his  goods  as  agreed, 
he  forces  the  seller  to  carry  the  account  with  his  own 
or  borrowed  capital  with  no  compensation  for  the  addi- 
tional term  of  credit,  and  each  day  the  credit  is  un- 
liquidated adds  that  much  to  the  seller's  loss  on  the 
transaction. 

It  is  apparent,  therefore,  that  the  open  account  ties 
up  the  funds  on  the  books  of  the  seller  unless  he  can  use 
them  in  such  a  way  as  above  indicated,  or  borrow  on 
his  general  credit  standing.  The  larger  firms  carry 
their  customers  by  selling  their  commercial  paper  in  the 
open  market,  or  borrow  from  their  local  banks  on  their 
own  promissory  notes.  But  whether  the  merchant 
hypothecates  his  receivables  or  borrows  to  carry  his 
customers,  funds  represented  by  receivables  are  non 
liquid  and  are  not  a  quick  banking  asset  in  the  sense 
that  we  shall  subsequently  discuss  in  treating  the 
acceptance. 

The  Object  of  the  Acceptance. 

The  introduction  of  the  acceptance  has  for  its  object 
the  elimination  of  all  the  disadvantages  of  the  open  ac- 
count and  is  the  logical  method  of  handling  transactions 
based  upon  credit.  Let  us  illustrate  the  relative  merits 
of  the  two  methods  by  a  simple  case,  and  at  the  same 
time  show  how  an  acceptance  works  out  in  practice. 

The  firm  of  A  and  B  have  a  contract  for  furnishing 
a  restaurant  with  its  equipment,  consisting  of  ranges, 
cooking  utensils,  dishes,  furniture,  linen  and  silver. 
Payment  is  due  when  the  outfit  is  ready  for  business. 
In  the  open  account  method,  the  buyer  is  charged  the 
amount  on  the  books  of  A  and  B  when  the  goods  are 


200  THE  BUSINESS  MAN  AND  HIS  BANK 

delivered  to  the  restaurant  premises  and  the  amount 
represented  thereby  becomes  a  ''receivable"  to  the 
seller.  If  they  must  go  out  into  the  market  and  buy 
the  articles,  they  in  turn  must  create  receivables  to  the 
seller,  or  borrow  in  order  to  meet  their  payments.  The 
funds  are  tied  up  until  payment  is  made  by  the  restau- 
rant firm,  even  though  part  payment  is  made  from  time 
to  time. 

If,  on  the  other  hand,  the  terms  of  the  sale  are  that 
A  and  B  will  draw  a  sixty  day  draft  for  each  lot  of  goods 
delivered,  which  the  restaurant  firm  must  accept  upon 
delivery,  A  and  B  have  an  instrument  that  they  can 
immediately  discount  at  their  bank.  If  A  and  B  also 
accept  drafts  on  themselves  as  goods  are  delivered  to 
them,  the  sellers  may  also  have  immediate  use  of  their 
funds.  All  parties  are  benefited,  for  as  soon  as  the 
accepted  draft  is  in  their  hands  they  have  an  obligation 
that  has  a  definite  maturity,  and  which  is  practical 
banking  paper.  It  carries  the  obligation  of  the  acceptor 
and  the  indorsement  of  the  maker  or  drawer. 

While  the  obligation  to  pay  on  the  open  account 
would  be  no  less  an  obligation,  its  form  is  such  as  to 
make  it  difficult  and  costly  to  handle;  while  the  accep- 
tance is  prima  facie  evidence  of  the  obligation  and  its 
form  is  such  as  to  make  it  a  usable  instrument  in 
banking  circles.     Its  simplicity  is  its  chief  virtue. 

Forms  of  Acceptances. 

There  are  two  forms  of  acceptances:  trade  acceptances; 
and  bank  acceptances.  The  trade  acceptance  is  simply 
a  bill  of  exchange  arising  out  of  a  sale  of  goods,  which 
has  been  accepted  by  the  buyer  by  writing  the  word 
''accepted"  across  the  face  of  the  bill,  with  his  name  and 
the  date  underneath.  By  so  doing  he  assents  to  the 
terms  of  the  bill  and  agrees  to  pay  it  according  to  its 


ACCEPTANCES  AND  THEIR  UHES 


201 


aoNVXdaoDV  3av>ix 


202  THE  BUSINESS  MAN  AND  HIS  BANK 

tenor.  He  assents  that  the  goods  have  been  received, 
and  that  the  amount  is  due  and  will  be  paid.  If  there 
is  any  dispute  it  does  not  affect  the  instrument,  such 
matters  being  adjusted  independently. 

In  the  bank  acceptance,  the  acceptor  is  a  bank  instead 
of  a  private  party.  While  trade  acceptances  are  used 
most  frequently  in  domestic  transactions,  the  bank  ac- 
ceptance is  used  extensively  in  foreign  transactions,  or 
those  involving  the  importation  or  exportation"  of 
goods. 

We  may  make  another  classification  into  documen- 
tary bills — bills  accompanied  by  shipping  papers,  bill 
of  lading,  insurance,  invoice,  etc.,  and  clean  bills — that 
is,  bills  without  documents.  There  are  also  bills  pro- 
viding for  the  release  of  the  documents  upon  payment 
of  the  sum,  and  bills  that  release  the  papers  upon 
acceptance. 

The  Operation  of  a  Bank  Acceptance  in  a  Foreign 
Transaction. 
The  operation  of  a  bank  acceptance  in  a  foreign 
transaction  is  as  follows.  Let  us  assume  that  a  coffee 
merchant  in  New  York  has  contracted  with  a  coffee 
exporter  in  Brazil  for  a  cargo  of  coffee.  The  merchant 
in  New  York  may  not  be  known  to  the  exporter,  or  even 
if  so,  the  latter  desires  his  money  as  soon  as  the  cargo  is 
ready  to  ship.  He  cannot  wait  until  the  goods  are  de- 
livered and  paid  for  by  bank  check.  He  cannot  take 
the  merchant's  note  and  have  it  discounted  at  his  bank, 
for  the  Brazil  bank  may  know  nothing  of  the  New  York 
merchant's  affairs,  and  moreover,  custom  has  decreed 
that  such  transactions  shall  be  for  cash  as  between  buyer 
and  seller.  Therefore  the  New  York  merchant  arranges 
with  his  bank  for  a  bank  acceptance.  The  beginning 
of  this  transaction  is  a  letter  of  credit,  issued  by  the 


ACCEPTANCES  AND  THEIR  USES 


203 


204  THE  BUSINESS  MAN  AND  HIS  BANK 

New  York  bank,  which  states  that  the  bank  in  New  York 
will  accept  drafts  on  the  New  York  merchant  up  to  a 
certain  amount,  if  accompanied  by  certain  documents, 
such  as  bill  of  lading,  insurance  papers,  invoice,  etc. 
The  New  York  merchant  is  furnished  with  a  copy  of 
the  letter  of  credit,  which  he  sends  to  the  exporter  in 
Brazil,  which  authorizes  the  latter  to  draw  on  the  bank 
as  soon  as  the  coffee  is  on  board  ship. 

As  soon  as  the  conditions  of  the  letter  of  credit  are 
complied  with,  the  exporter  takes  the  papers  to  his 
bank,  and  the  latter,  having  assurance  that  the  goods 
will  be  paid  for  on  arrival,  by  virtue  of  the  letter  of 
credit,  buys  the  bill  from  the  exporter,  and  forwards  the 
same  to  its  New  York  correspondent  for  collection.  The 
latter  presents  the  bill  to  the  bank  that  issued  the  credit, 
which  accepts  the  bill,  thereby  obtaining  the  docu- 
ments accompanying,  which  gives  the  bank  technical 
possession  of  the  coffee.  The  bill  now  bears  the  promise 
of  the  bank  to  pay  at  maturity,  and  can  readily  be  ne- 
gotiated in  the  money  market,  being  a  favored  form  of 
bank  investment- — prime  paper,  as  it  is  called. 

The  coffee,  however,  must  be  turned  into  money  in 
order  to  meet  the  acceptance  when  due,  and  must  there- 
fore be  turned  over  to  the  merchant  for  sale.  The  bank 
takes  a  "trust  receipt'  from  him,  which  in  effect  gives 
him  possession  of  the  coffee,  but  retains  the  legal  title 
in  the  bank  until  paid  for.  He  can  now  sell  the  coffee 
and  from  the  proceeds  will  have  funds  in  the  bank  to 
meet  the  acceptance  at  maturity.  The  coffee  might 
be  stored  in  storage  warehouse,  and  warehouse  receipts 
delivered  to  the  bank  as  security  for  the  goods,  which 
would  be  released  to  the  merchant  as  needed  for  curient 
sales. 

It  will  readily  be  seen  that  the  bank  has  parted  with 
no  money  in  such  a  transaction.     It  has  simply  loaned 


ACCEPTANCES  AND  THEIR  USES  205 

its  credit,  first  by  guaranteeing  to  accept  the  bill  and 
afterward  by  accepting.  It  has  secured  itself  by  taking 
legal  title  to  the  goods,  and  at  the  same  time  permitted 
the  merchant  to  sell  them  as  if  they  were  his  own  prop- 
erty, the  only  restriction  being  that  the  proceeds  shall 
be  turned  into  the  bank  to  meet  the  acceptance  when 
the  due  date  arrives. 

The  danger  lies  in  the  fact  that  the  goods  may  not 
realize  the  price  paid  for  them  or,  they  might  spoil,  if 
perishable,  before  sold,  in  which  case  the  merchant's 
general  credit  would  come  into  play.  For  thus  expedit- 
ing, or  better,  making  possible,  the  importation  and 
sale  of  the  coffee,  the  bank  makes  a  small  charge  for  the 
risk  it  has  assumed.  This  is  termed  a  foreign  bank 
acceptance,  since  it  involves  inter-country  dealings. 

A  Domestic  Acceptance. 

In  a  domestic  acceptance,  that  is,  one  involving,  let 
us  say  the  shipment  of  a  cargo  of  flour  from  Minneapolis 
to  New  York,  the  operation  would  be  precisely  the  same, 
except  that  the  acceptance  might  be  returned  to  the 
miller  who  would  discount  the  same  at  his  bank,  or  the 
transaction  could  be  put  through  his  local  bank  which 
would  give  him  credit  for  the  proceeds  of  the  bill  as  soon 
as  the  flour  was  loaded  and  the  bill  with  complete  docu- 
ments presented  to  it.  The  advantage  in  the  latter  case 
would  be  due  to  the  fact  that  the  New  York  bank  issu- 
ing the  letter  of  credit  would  be  better  known  to  the 
Minneapolis  banks  than  it  would  to  the  South  American 
banks,  and  therefore  the  more  readily  accepted. 

Principles  of  the  Acceptance. 

The  fundamental  princii)les  of  the  acceptance  are: 
first,  that  the  seller  shall  have  absolute  assurance  that 
the  goods  will  be  paid  for  on  production  of  the  documents 
representing  the  shipment.     This  is  covered  by  the  let- 


206  THE  BUSINESS  MAN  AND  HIS  BANK 

ter  of  credit.  Second,  that  the  bank  issuing  the  letter 
and  making  the  acceptance  shall  have  security  for  the 
goods  while  in  the  process  of  manufacture  or  resale. 
This  is  covered  by  the  trust  receipt  or  the  warehouse 
receipt.  The  former  retains  title  in  the  bank  until  the 
goods  are  finally  paid  for,  and  the  latter  keeps  the 
bank  in  actual  possession  of  the  goods  until  released. 

In  recent  bank  statements  there  will  be  found  two 
items  that  have  a  bearing  on  the  acceptance  business 
of  the  bank.  On  the  asset  side  will  be  found  ''Obli- 
gations of  customers  on  account  of  acceptances."  This 
means  notes  or  other  obligations,  or  other  forms  of 
security  held  by  the  bank  as  guaranty  for  the  payment 
to  it  of  moneys  advanced  or  obligations  incurred  for 
account  of  customers. 

On  the  liability  side  will  be  found  "Liability  for  accep- 
tances executed  for  customers."  This  means  the  liability 
of  the  bank  incurred  by  reason  of  letters  of  credit  issued 
or  acceptances  made  for  its  customers.  Both  items 
are  always  in  the  same  amount,  which  indicates  that 
for  every  dollar  of  obligation  the  bank  incurs  against 
itself,  it  takes  a  dollar  of  obligation  or  security  running 
to  itself. 

These  bank  acceptances  are  now  offered  in  the  open 
market  by  firms  that  make  a  specialty  of  this  line  of 
finance,  and  circulars  are  sent  out  weekly  or  oftener 
offering  the  acceptances  of  certain  banks,  giving  the 
time,  the  amount  and  the  rate  of  discount.  In  New 
York  there  is  an  open  and  active  daily  market  for  such 
paper  and  the  transactions  now  run  into  large  amounts. 
It  is  equivalent  to  buying  the  promissory  note  of  the 
bank  making  the  acceptance.  The  bank's  obligation 
in  an  acceptance  is  the  same  as  on  its  bank  notes,  except 
that  one  is  payable  on  demand  and  the  other  at  a  stated 
time. 


ACCEPTANCES  AND  THEIR  USES  207 

Advantages  of  the  Acceptance  to  the  Seller. 

The  acceptance  form  of  credit  has  certain  distinct 
advantages  over  the  open  book  account  or  the  promissory 
note  given  in  payment  of  goods.  First,  it  gives  the  seller 
immediate  payment  for  his  goods  in  a  form  that  can 
readily  be  discounted  at  his  bank,  and  by  the  bank  in 
turn,  can  be  rediscounted  at  the  Federal  Reserve  Bank. 
Being  paper  that  is  eligible  for  rediscount  at  the  Fed- 
eral Reserve  Bank,  members  of  the  Federal  Reserve 
Bank  may  freely  discount  such  paper  in  the  assurance 
that  it  may  be  quickly  turned  into  money  by  the  dis- 
count facilities  of  the  Federal  Reserve  Banks. 

Second,  the  seller  has  in  his  possession  indisputable  evi- 
dence that  the  sale  has  been  consummated  and  that 
payment  will  be  made  according  to  the  terms. 

Third,  being  a  favored  form  of  banking  instrument, 
it  will  be  discounted  at  a  rate  of  interest  which  is  often 
lower  than  on  single  name  paper,  thus  adding  to  the 
profits  or  reducing  the  cost  of  money  to  the  seller. 

In  the  fourth  place  the  elimination  of  the  open  account 
and  the  substitution  of  the  acceptance  will  reduce  the 
amount  of  capital  required  in  a  business,  and  the  burden 
of  carrying  the  credit  wdll  rest  upon  the  banks,  which 
are  especially  created  for  such  a  purpose,  and  are  pe- 
culiarly fitted  to  assume  such  burdens. 

Fifth,  it  has  been  estimated  that  from  two  to  three 
times  the  volume  of  business  can  be  done  on  the  same 
capital  by  the  use  of  acceptances  instead  of  on  open 
book  accounts.  This  would  in  turn  lower  the  operating 
costs  and  increase  the  profits  to  the  invested  capital. 

Sixth,  there  will  not  be  the  necessity  of  selling  book 
accounts  to  obtain  working  capital,  thus  avoiding  the 
high  cost  of  money  to  those,  who  by  force  of  circum- 
stances, have  been  obliged  to  adopt  this  expensive 
method.     Our  national  business  vices  have  been  said  to 


208  THE  BUSINESS  MAN  AND  HIS  BANK 

be  trying  to  do  business  on  too  small  capital,  and  the  ex- 
tension of  too  long  credit.  The  acceptance  will  correct 
both  of  these  evils. 

If  the  retailer  were  to  give  the  wholesaler  accep- 
tances, the  latter  would  in  turn  dispose  of  them  to  the 
banks,  and  the  banks  to  the  Federal  Reserve  Banks,  to 
be  by  them  used  as  the  basis  of  the  circulating  currency 
of  the  country  as  discussed  under  the  chapter  on  Federal 
Reserve  Banks,  thus  converting  the  four  thousand  millions 
represented  by  book  accounts  from  a  'Hied  up  asset" 
to  a  circulating  credit,  to  be  used  by  the  business  inter- 
ests of  the  country  to  a  distinct  profit. 

The  acceptance  method  will  curtail  if  not  end  the 
bad  practice  of  taking  unearned  or  unauthorized  dis- 
counts and  reduce  the  returned  merchandise  evil. 

Inasmuch  as  the  Federal  Reserve  Banks  generally 
quote  an  interest  rate  of  about  \i  per  cent,  lower  for 
acceptances  than  for  promissory  notes,  the  cost  of  money 
is  reduced  accordingly. 

Even  though  the  seller  does  not  need  to  discount  the 
acceptances  received  from  his  customers,  the  fact  that  he 
holds  paper  that  is  readily  accepted  by  his  bank  gives  him 
the  assurance  of  quick  money  when  he  needs  it.  He  has 
the  best  security  the  bank  can  ask  for,  namely  two  name 
paper,  of  short  maturity,  and  widely  scattered  as  to  the 
business  risks. 

It  also  gives  the  seller  his  maturing  payments  week  by 
week  with  reasonable  certainty.  It  is  found  in  practice 
that  a  merchant  regards  the  obligation  that  has  a  fixed 
maturity  in  a  different  light  from  one  having  an  indefinite 
and  elastic  date.  All  firms  are  jealous  of  their  credit 
and  anything  that  tends  to  weaken  that  credit  should 
be  discouraged,  and  anything  that  strengthens  it  should 
be  encouraged. 


ACCEPTANCES  AND  THEIR  USES  209 

Advantages  To  the  Buyer. 

First,  he  will  have  the  advantage  of  lower  prices. 
Since  the  cost  of  money  enters  into  the  price  of  goods, 
the  lower  the  cost  of  money  the  lower  the  cost  of  goods. 

Second,  having  assumed  a  liabiUty  with  a  definite 
maturity,  he  will  buy  cautiously,  extend  credit  conserva- 
tively and  collect  promptly.  He  will  be  a  better  credit 
risk  and  will  accept  better  credit  risks.  The  open  ac- 
count invites  slow  and  loose  credit  methods. 

Third,  those  who  buy  on  the  acceptance  method  will 
put  themselves  in  the  class  of  preferred  buyers,  or  essen- 
tially cash  customers,  while  those  who  adhere  to  the  open 
account  method  will  be  at  a  disadvantage  in  comparison. 

The  reduction  of  costs,  economies  in  management,  and 
business  efficiency  being  for  the  public  good,  the  retailer, 
by  giving  acceptances  relieves  the  jobber,  and  he  by 
the  same  process  relieves  the  wholesaler,  from  the  bur- 
den of  acting  as  banker,  a  service  which  the  buyer  has 
forced  the  seller  to  assume  at  considerable  expense. 

The  acceptance  will  create  in  the  mind  of  the  buyer  a 
sense  of  responsibility  towards  his  obligations,  if  he 
agrees  distinctly  to  stated  credit  terms  that  cannot  be 
ignored  except  to  his  hurt.  It  will  create  a  higher  class  of 
merchants  than  we  have  heretofore  had. 

It  will  simphfy  the  bookkeeping  methods  of  business 
concerns,  acceptance  bookkeeping  having  many  advan- 
tages over  the  open  account  in  its  bookkeeping  processes. 

Advantages  To  the  Banks. 

Anything  that  redounds  to  the  safety  and  profit  of 
business  redounds  to  the  safety  and  profit  of  the  banks. 
They  are  affected  by  the  same  influences.  Banking 
experience  has  demonstrated  that  the  loan  that  is  based 
upon  an  agreement  and  sale  of  goods  is  the  most  satis- 
factory of  all  loans,  on  account  of  the  self  liquidation  of 

14 


210  THE  BUSINESS  MAN  AND  HIS  BANK 

the  debt.  And  the  trade  acceptance,  arising  out  of 
such  a  transaction,  is  therefore  the  most  desirable  bank- 
ing security.  It  is  fundamentally  sound  and  doubly 
protected  by  the  two  name  liability. 

Most  banks  are  limited  in  their  direct  lending  to  a 
proportion  of  their  capital  and  surplus,  usually  ten  per 
cent;  but  acceptances  do  not  come  under  this  rule  and 
broadly  speaking  there  is  no  fixed  limit  for  such  paper. 
Business  men  can  therefore  secure  a  larger  line  of  dis- 
count, and  banks  can  legally  and  safely  extend  such 
discounts  beyond  the  rigid  rule  laid  down  in  the  law 
for  such  advances. 

Acceptances  furnish  the  banker  the  highest  credit 
information,  namely,  accurate  information  as  to  the 
origin  and  purpose  of  the  instrument;  and  whatever 
helps  to  dignify  an  instrument  will  help  in  its  acceptance 
by  the  bank.  And  inasmuch  as  the  business  man  must 
borrow,  the  better  the  form  of  instrument  offered,  the 
quicker  and  the  easier  is  the  loan  obtainable. 

Acceptances  not  an  Innovation. 

The  acceptance,  while  comparatively  new  to  American 
banking  and  business  interests,  is  by  no  means  a  new 
idea,  such  instruments  having  been  in  use  in  European 
countries  for  many  years.  It  is  the  common  method  of 
financing  business  transactions  in  England,  France  and 
Germany. 

Prior  to  the  advent  of  the  Federal  Reserve  Banks, 
national  banks  were  not  permitted  to  make  acceptances, 
although  a  few  of  the  large  trust  companies  were  making 
them  on  a  small  scale;  but  with  the  legalizing  of  this 
form  of  credit,  for  both  state  and  national  banks,  such 
institutions  have  encouraged  acceptances  by  making 
them  freely.  Chambers  of  commerce,  credit  men's 
associations  and  large  business  interests  have  instituted 


ACCEPTANCES  AND  THEIR  USES  211 

propaganda  seeking  to  popularize  the  acceptance,  and 
the  growth  of  this  Une  of  finance  during  the  past  five 
years  has  been  quite  remarkable. 

Heretofore  importers  in  the  United  States  have  been 
obliged  to  arrange  their  credits  through  the  London 
banks.  These  banks  are  known  throughout  the  world 
and  have  branches  in  all  important  centres  of  trade, 
and  a  letter  of  credit  issued  by  any  of  these  banks  is 
good  anywhere.  American  importers  have  arranged 
with  their  local  bank  to  obtain  such  letters  on  London, 
the  American  bank  guaranteeing  the  credit  to  the  London 
bank.  They  have,  therefore,  on  account  of  the  indirect 
connection,  been  obliged  to  pay  two  commissions,  one 
to  London  and  one  to  the  local  bank.  Thus,  in  the 
coffee  transaction,  under  the  old  system,  the  credit 
would  have  been  arranged  through  London  by  the 
American  bank,  and  two  commissions  would  have  been 
charged.  Under  present  methods  the  credit  could  be 
arranged  direct  with  an  American  bank. 

On  account  of  the  important  role  the  United  States 
has  played  in  the  financial  affairs  of  the  world  during 
the  war,  American  banks  have  taken  a  front  rank  among 
the  great  banks  of  the  world,  and  "dollar  exchange," 
or  ''dollar  drafts,"  meaning  drafts  drawn  in  dollars  on 
American  banks,  are  now  recognized  in  all  parts  of  the 
world.  American  credits  will  shortly  be  if  they  are 
not  already  on  a  par  with  London  credits.  It  has  been 
estimated  that  American  importers  and  exporters  have 
been  paying  London  banks  upwards  of  ten  million 
dollars  yearly  for  such  acceptance  credits.  This  will 
now  come  to  American  banking  interests. 

The  purpose  of  the  acceptance  being  to  bring  about 
a  more  scientific  method  of  financing  the  business  of  the 
country,  the  Federal  Reserve  Act  does  not  permit 
acceptances  to  be  made  for  the  purpose  of  borrowing 


212  THE  BUSINESS  MAN  AND  HIS  BANK 

money  or  for  carrying  stocks  and  bonds.  They  must 
arise  out  of  a  business  transaction,  — a  sale  of  goods. 
They  must  be  of  short  maturity,  in  most  instances  Um- 
ited  to  90  days.  And  any  acceptance  that  so  arises  is 
ehgible  for  rediscount  in  the  Federal  Reserve  Bank. 
Of  course,  the  customer's  bank  may  lend  on  any  form 
of  acceptance  that  would  constitute  a  lawful  loan  of 
money,  but  the  acceptance  must  conform  to  the  rules 
of  the  Federal  Reserve  Bank  to  be  accepted  by  them  for 
rediscount. 

According  to  rulings  of  the  Federal  Reserve  Board, 
members  of  the  Federal  Reserve  Bank  may  accept  for 
themselves  bills  of  exchange  arising: 

1.  Out  of  the  shipment  of  goods  between  the  United 
States  and  any  foreign  country,  or  between  the  United 
States  and  any  of  its  dependencies,  or  between  foreign 
countries. 

2.  The  shipment  of  goods  within  the  United  States  if 
the  bill,  when  accepted,  is  accompanied  by  shipping 
documents. 

3.  The  storage  within  the  United  States  of  readily 
marketable  goods,  provided  the  acceptor  of  the  bill  is 
secured  by  warehouse,  terminal  or  similar  receipt. 

4.  The  storage  within  the  United  States  of  goods 
which  have  actually  been  sold,  provided  the  acceptor  of 
the  bill  is  secured  by  the  pledge  of  such  goods. 

5.  If  the  bill  is  drawn  by  a  bank  or  banker  in  a  for- 
eign country  or  a  dependency  of  the  United  States  for 
the  purpose  of  furnishing  dollar  exchange. 

All  bills  drawn  in  accordance  with  the  above  condi- 
tions and  having  a  maturity  at  the  time  of  discount  of 
not  more  than  90  days  exclusive  of  days  of  grace,  and 
endorsed  by  a  member  bank,  are  eligible  for  rediscount 
in  the  Federal  Reserve  Bank. 


CHAPTER  XXIII 
SAVINGS   BANKS 

The  value  of  the  savings  bank  to  the  business  interests 
of  the  country  and  the  place  of  this  type  of  bank  in  the 
financial  scheme  can  best  be  seen  by  contrasting  it  with 
the  bank  of  discount,  whose  operations  we  have  already 
treated  at  length.  Let  us,  however,  review  briefly 
these  functions. 

In  the  first  place  the  bank  of  discount  promotes  the 
business  interests  of  the  community  by  affording  a  safe 
place  for  the  deposit  of  the  money  funds  that  form  the 
working  capital  of  business,  these  funds  being  subject 
to  the  checking  process,  by  which  their  ownership  is 
transferred  from  one  to  another  and  from  place  to  place. 
The  bank  of  discount  comes  into  existence  because  men 
have  accumulated  capital  and  have  invested  it  in  a  bank- 
ing enterprise.  The  bank  not  only  exists  because  of 
accumulated  capital,  but  it  continues  to  do  business) 
because  men  have  acquired  capital  for  use  in  their  own 
business  and  employ  it  largely  through  the  medium  of 
business  bank. 

In  the  second  place,  through  the  loaning  or  discount 
function,  the  bank  of  discount  carries  the  debts  of  the 
business  world,  affords  working  capital  to  those  whose 
credit  is  good,  and  purchases  the  instruments  of  debt 
that  arise  in  business  transactions,  thus  relieving  the 
business  world  of  the  burden  of  operating  on  private 
capital.  On  the  principle  that  borrowed  money  is 
equivalent  to  capital  if  used  for  productive  purposes, 
and  the  business  man  may  treat  his  bank  loans  as  he 

213 


214  THE  BUSINESS  MAN  AND  HIS  BANK 

does  his  own  savings  in  carrying  on  his  business,  the  bank 
of  discount  is  the  medium  through  which  the  business 
world  acquires  and  uses  a  large  part  of  its  working 
capital. 

Finally  through  the  note  issue  function,  the  business 
world  is  furnished  with  its  circulating  currency,  without 
which  it  could  not  operate.  Inasmuch  as  the  needs 
of  business  require  the  use  of  money  for  the  smaller  ex- 
changes, bank  notes  are  necessary,  and  the  banks  by 
furnishing  such  instruments  vitally  assist  in  carrying  on 
the  business  transactions  with  cheapness  and  dispatch. 

The  Function  of  the  Savings  Bank. 

In  contrast  with  the  above  we  have  the  savings  bank 
which  provides  none  of  the  foregoing  services  and  yet 
performs  an  equally  acceptable  and  necessary  function. 
The  term  savings  bank  is  applied  to  those  institutions 
without  capital  stock  that  are  organized  for  the  purpose 
of  assisting  people  of  small  means  to  save  money,  and 
to  reward  the  saving  of  Inoney  by  the  payinent  of  in- 
terest on  the  deposits  according  to  certain  standard  rules. 
While  there  are  less  than  seven  hundred  strictly  mutual 
savings  banks  in  the  United  States — that  is,  banks  with- 
out capital  and  operated  solely  for  the  benefit  of  the 
depositors,  there  are  many  other  institutions  that 
accomplish  the  same  purpose.  Among  these  may  be 
mentioned  the  banks  of  discount  which  operate  ''savings 
departments,"  building  and  loan  associations,  stock 
savings  banks  (practically  the  same  as  banks  of  dis- 
count) and  mutual  investment  companies;  in  fact,  any 
institution  that  accepts  small  deposits,  pays  interest 
on  them,  and  whose  aim  is  to  encourage  the  saving  habit, 
is  essentially  a  savings  bank. 

The  savings  bank  starts  without  capital  of  its  own  and 
its  stock  in  trade  consists  of  the  deposits  of  the  public. 


SAVINGS  BANKS  215 

It  is  therefore  an  assembler  of  capital — the  reservoir  into 
which  the  small  streams  of  capital  flow,  accumulating 
force  as  the  deposit  fund  increases.  In  the  sense  that  it 
affords  a  safe  depositary,  it  resembles  the  bank  of  dis- 
count, but  it  differs  in  that  it  does  not  allow  the  checking 
function  to  operate,  the  payments  being  over  the  counter. 
It  never  issues  bank  notes  and  lends  only  on  security. 
It  makes  no  "open  credit "  loans.  We  can  see  the  differ- 
ence more  clearly  by  contrasting  the  contract  of  the  sav- 
ings bank  with  that  of  the  bank  of  discount.  When  an 
account  is  accepted  by  the  bank  of  discount,  the  bank 
becomes  the  debtor  of  the  depositor  and  agrees  to  repay 
the  money  on  demand,  this  demand  taking  the  form  of  a 
check.  This  agreement  is  general  and  not  specific 
and  exists  only  in  the  law.  The  savings  bank,  however, 
enters  into  a  distinct  and  printed  contract  with  the 
depositor,  the  pass  book  which  contains  the  by-laws  being 
the  contract  of  deposit.  In  this  contract  the  savings 
bank  agrees  to  invest  the  money  according  to  law,  to 
pay  such  interest  as  may  be  warranted,  and  to  make 
repayment  only  upon  production  of  the  book,  with  an 
order  in  writing  signed  by  the  depositor  or  his  attorney 
or  lawful  representative.  The  pass  book  is  therefore 
required  with  every  transaction  and  an  order  on  a  savings 
bank  is  not  a  negotiable  instrument  because  of  this  fact. 
The  manner  in  which  a  savings  bank  may  invest  its 
funds  is  closely  covered  by  the  laws  of  the  various  states, 
the  law  being  explicit  and  most  conservative  in  this 
respect.  These  investments  are  of  two  kinds:  (a) 
mortgage  loans  and  (b)  bonds. 

Mortgage  Loans. 

All  states  permit  savings  banks  to  invest  in  mortgage 
loans,  or  in  other  words  to  lend  on  real  estate  security. 
In  fact  this  form  is  encouraged  on  account  of  the  safety 


216  THE  BUSINESS  MAN  AND  HIS  BANK 

and  benefits.  Of  all  forms  of  investment,  mortgage  loans 
no  doubt  have  the  cleanest  record,  losses  from  this  line  of 
investment  being  practically  nil.  It  not  only  helps 
toward  home  ownership  and  the  acquiring  of  property, 
but  it  has  a  broad  economic  aspect  that  redounds  to  the 
common  good.  Let  us  see  this  by  a  practical  example. 
The  Bank  of  Savings  has  accumulated  $100,000  from  a 
thousand  depositors.  This  fund  must  be  made  to  earn 
an  income,  from  which  to  pay  the  expenses  of  the  bank 
and  to  give  the  depositors  return  on  their  deposits.  The 
bank  therefore  agrees  to  make  ten  $10,000  loans  on 
various  new  buildings.  Immediately  the  wheels  of 
industry  begin  to  move.  The  builder  begins  to  buy 
lumber  and  building  materials  of  various  kinds,  and  to 
employ  laborers  and  mechanics.  Wherever  lumber 
and  cement,  brick,  iron,  paint  and  all  that  enters  into 
building  construction  is  produced,  the  impetus  is  felt, 
and  the  accuhiulated  savings  of  the  thousand  people 
find  their  way  back  into  the  channels  of  trade  and  com- 
merce and  benefit  ten  thousand  other  people.  And  after 
paying  the  costs  of  living,  the  balance  finds  its  way 
back  into  the  banks  for  another  like  purpose,  and  the 
savings  bank  becomes  an  institution  of  perpetual  motion 
and  a  continual  round  of  beneficial  activity.  It  will 
here  be  opportune  to  discuss 

How  a  Mortgage  Loan  is  Made. 

The  making  of  a  mortgage  loan  affects  so  many  people 
and  is  such  a  common  experience  that  the  method  of 
procedure  should  be  known  to  all.  Let  us  follow  the 
practice  of  a  large  and  well  managed  savings  bank  as 
typical.  First,  we  have  the  application  for  the  loan. 
This  gives  the  location  of  the  property,  size,  character  of 
building,  improvements,  value  of  the  land,  buildings, 
and  other  details  as  the  bank  may  elect.     An  appraisal 


SAVINGS  BANKS  217 

fee  is  often  required  to  cover  the  cost  of  examination  of 
the  property.  In  this  stage  the  application  is  turned  over 
to  an  appraiser  of  appraisal  committee  who  examine  the 
property  and  report  their  valuation  and  recommenda- 
tion. The  amount  loaned  does  not  often  exceed  sixty  per 
cent  of  the  appraised  value  and  is  limited  by  law  in  most 
states.  The  amount  of  the  loan  having  been  agreed 
upon,  the  matter  is  reported  to  the  board  of  trustees 
and  the  loan  accepted  and  authorized  closed. 

In  the  third  stage  the  attorney  of  the  bank  will 
institute  a  ''search"  of  the  property  to  ascertain  if  the 
title  is  clear  and  in  the  borrower.  When  the  ownership 
of  the  property  has  been  traced  back  a  number  of  years, 
sometimes  as  far  back  as  fifty  years  or  more,  and  no 
liens,  judgments,  unpaid  taxes,  assessments,  or  other 
claims  are  found  that  will  affect  the  title,  a  '^  certificate 
of  title"  is  issued.  If  a  title  company  makes  the  search, 
there  is  issued  a  "title  policy"  which  not  only  certifies 
to  the  title,  but  guarantees  that  the  title  is  as  stated. 
The  papers  are  then  drawn.  These  are  :  (1)  the  bond, 
which  is  the  obhgation  to  pay.  (2)  the  mortgage, 
which  is  the  security.  These  papers  always  come  in 
pairs,  and  are  spoken  of  as  the  "bond  and  mortgage" 
and  the  loan  as  "a  loan  on  bond  and  mortgage."  The 
mortgage  is  a  "conditional  deed,  "  by  which  the  borrower 
transfers  the  property  to  the  lender  conditional  upon 
the  payment  of  principal  and  interest,  and  if  payment  of 
interest  and  principal  is  not  made  as  provided  for  in 
the  bond,  the  lender  may  sell  the  property  under  the 
mortgage.  The  selling  process  is  called  "foreclosing," 
or  shutting  out  the  right  of  the  borrower  to  repay  the 
amount  borrowed  and  be  discharged  of  the  debt  and 
have  the  property  released  from  the  lien  created  by  the 
mortgage.  In  other  words,  as  long  as  the  borrower 
pays  the  interest  and  principal  as  agreed,  the  mortgage 


218  THE  BUSINESS  MAN  AND  HIS  BANK 

is  inoperative;  but  when  defaulted,  the  mortgage  may 
be  enforced  and  the  debt  collected  out  of  the  proceeds 
of  the  property  when  sold  at  public  sale. 

After  being  signed,  the  papers  must  be  recorded. 
Only  the  mortgage  is  entered  for  record,  in  the  County 
Clerk's  office,  thus  making  the  loan  a  lien  of  record  upon 
the  property.  In  addition  to  the  bond  and  mortgage 
there  is  required  the  certificate  of  title  or  title  policy, 
as  before  noted,  the  insurance  policy,  endorsed  to  the 
lender  (called  the  mortgagee),  tax  receipts  or  tax  search, 
showing  all  taxes  to  have  been  paid,  and  the  appraisal 
of  the  property.  The  latter  is  usually  a  certificate  of 
value  on  the  original  application. 

The  same  procedure  obtains  in  the  case  of  a  private 
loan  and  the  process  is  quite  the  same  everywhere. 
In  some  states  there  is  a  mortgage  note  in  place  of  the 
bond  and  a  series  of  interest  notes  for  the  collection  of 
the  interest  as  it  falls  due. 

It  is  necessary  in  all  mortgage  loans  to  keep  the  taxes 
paid,  the  insurance  in  force,  and  running  to  the  lender. 
The  payment  of  interest  is  of  course  necessary  to  pre- 
vent foreclosure,  but  this  devolves  upon  the  borrower. 
Tax  payments  are  evidenced  by  tax  receipts  and  insur- 
ance by  the  policy  properly  indorsed. 

Valuation  of  Real  Estate. 

The  valuation  of  real  estate  is  surrounded  by  so  many 
elements  that  extensive  treatment  of  the  subject  cannot 
be  undertaken  here.  There  are  three  methods  of  arriv- 
ing at  a  valuation:  (1)  The  replacement  value,  or  the  cost 
to  reproduce  the  property  under  current  conditions;  (2) 
the  market  value  of  the  premises;  and  (3)  the  capitalized 
rental  value. 

The  market  value  is,  of  course,  the  price  it  will  bring 
if  sold,  but  the  best  test  of  all  is  the  ''capitalized  rent." 


SAVINGS  BANKS  219 

This  simply  means  the  value  of  the  property  as  an  in- 
vestment. It  is  axiomatic  that  property  must  show  a 
net  income  if  it  is  to  be  of  any  financial  benefit  to  the 
owner  in  the  present.  However  much  value  it  may 
appear  to  have  in  the  future,  it  must  show  an  earning 
power  in  the  present  if  it  is  to  be  regarded  as  an  invest- 
ment and  not  a  speculation.  The  charges  against 
property  are:  interest  on  the  mortgage,  if  any,  taxes, 
insurance,  water  rents,  repairs,  depreciation.  These 
items  deducted  from  the  gross  rental  gives  the  net 
income.  Therefore  property  must  earn  as  a  rule  at 
least  ten  per  cent,  to  show  any  adequate  return,  and 
its  value  should  be  on  the  basis  of  ten  per  cent,  income. 
If  it  does  not  earn  this  amount,  the  value  must  be  de- 
termined from  other  sources.^ 

Bond  Investments. 

The  second  line  of  investment  of  savings  banks  is 
bonds  of  various  kinds.  To  enumerate  these  would  be 
to  give  a  digest  of  the  various  state  laws.  In  some 
states  the  banks  are  free  lances  and  are  allowed  a  wide 
latitude  in  regard  to  the  bonds  they  may  buy,  while  in 
others  the  law  is  strict  and  the  investments  limited. 
Municipal  bonds,  that  is,  bonds  of  governments,  states, 
cities,  counties,  villages  and  school  districts,  are  every- 
where legal.  Bonds  of  railroads,  street  railway  com- 
panies, light  and  power  companies  and  "industrials" 
are  also  legal  in  some  states,  but  as  a  rule  stocks,  except 
bank  stock,  are  not  authorized. 

Interest  Rules. 

The  interest  rules  are  more  or  less  uniform.  Interest 
is  paid  on  deposits,  quarterly  or  half  yearly,  on  such  sums 

1  (See  chapter  on  Mortgage  Loans  and  Real  Estate  Values  in  The 
Savings  Bank  and  its  Practical  Work  by  tlie  same  author.) 


220  THE  BUSINESS  MAN  AND  HIS  BANK 

as  have  been  on  deposit  for  a  certain  length  of  time, 
either  from  the  first  of  the  various  months  or  from  quar- 
terly periods.  Withdrawals  of  money  before  the  close 
of  the  period  usually  forfeit  interest.  Thus,  a  deposit 
made  on  July  1st  and  remaining  in  the  bank  until 
January  1st  will  be  entitled  to  six  months  interest;  but 
if  withdrawn  on  December  1st,  no  interest  will  be  al- 
lowed. Deposits  made  in  August  will  draw  from  Sep- 
tember 1st,  or  October  1st,  depending  upon  the  rules  of 
the  bank.  Interest  not  withdrawn  acts  as  principal 
and  becomes  such  as  soon  as  credited. 

Accounts  on  which  no  transactions  have  taken  place 
for  a  term  of  years,  running  from  five  to  twenty-two 
years,  become  ''dormant"  and  are  entitled  to  no  further 
interest.  The  writing  up  of  the  pass  book  keeps  the 
account  from  becoming  dormant  and  should  be  done  at 
frequent  periods.  In  some  states  these  accounts  are 
taken  over  by  the  state  and  in  others  remain  on  the 
books  of  the  bank  as  unclaimed  deposits,  subject  in  both 
cases  to  payment  upon  proper  proof  of  ownership. 

The  Management  of  a  Savings  Bank. 

The  management  of  a  savings  bank  differs  from  that 
of  a  bank  of  discount  in  that  the  managers  of  the  savings 
bank  are  called  ''trustees"  and  are  as  a  rule  elected  for 
life,  while  in  the  bank  of  discount  they  are  elected 
yearly  and  are  called  "directors."  The  trustee  has  no 
financial  interest  in  the  bank  and  in  some  jurisdictions 
is  not  even  allowed  to  be  a  depositor,  while  the  directors 
must  be  stockholders.  In  order  to  become  a  trustee 
of  a  savings  bank,  one  must  be  selected  and  elected  by 
the  other  trustees,  while  to  become  a  director,  one  need 
only  acquire  stock  votes  enough  to  elect  him.  There 
are  few  and  infrequent  changes  in  the  personnel  of  a 
savings  bank,  while  in  banks  of  discount  there  are  fre- 


SAVINGS  BANKS  221 

quent  and  sometimes  drastic  changes  in  the  management. 
Directors  as  a  rule  receive  a  fee  for  attending  the  meet- 
ings, while  trustees  do  not,  and  where  this  is  permitted 
the  remuneration  is  nominal  and  is  restricted  by  law. 
In  short  the  management  of  a  savings  bank  is  of  the 
same  character  as  that  of  a  church,  hospital  or  other 
public  institution. 

The  trustee  has  no  other  interest  in  the  bank  than  to 
obey  the  law  and  conserve  the  interests  of  the  depositors 
for  whom  he  acts,  while  the  director,  being  a  stockholder, 
shares  the  profits  of  the  bank  with  other  stockholders 
whom  he  represents. 

To  say  that  one  method  of  management  is  better  than 
the  other  is  to  express  mere  opinion,  for  it  is  certain  that  in 
many  banks  of  discount  the  management  is  as  of  high 
order  as  in  savings  banks  and  vice  versa.  It  is  largely 
a  question  of  men ;  but  there  can  be  no  manipulation  of 
a  savings  bank  for  private  gain,  and  the  losses  in  savings 
banks  are  exceptionally  small  and  failures  almost  an 
unknown  thing. 

The  profits  of  a  bank  of  discount  belong  to  the  stock- 
holders, and  the  surplus  is  built  up  for  their  benefit,  as 
well  as  to  protect  the  depositors;  but  in  the  savings  bank 
the  surplus  never  reverts  to  the  trustees,  they  having  no 
interest  in  building  it  up,  except  to  add  to  the  safeguards 
for  the  depositor.  In  case  of  liquidation  the  entire  sur- 
plus would  be  distributed  among  the  depositors. 

The  risks  taken  by  savings  banks  are  of  two  kinds. 
First,  advances  on  property  that  depreciates  and  so 
jeopardizes  the  mortgage  loans;  and  loans  that  must  be 
foreclosed  and  the  property  taken  over  and  sold  when 
opportunity  offers.  Such  losses  are  insignificant.  Sec- 
ond, bond  investments  that  prove  unwise  and  result  in 
defaulted  bonds  with  the  attending  losses.  These  too 
are  rare  and  of  no  consequence  in  the  great  mass  of 


222  THE  BUSINESS  MAN  AND  HIS  BANK 

investments  made  by  savings  banks.  Business  banks, 
lending  on  open  and  unsecured  credit,  assume  infinitely 
larger  risks  than  savings  banks.  As  a  matter  of  fact 
banks  of  discount  take  greater  risks  by  far  than  savings 
banks  can  possibly  assume,  and  therefore  require  a 
greater  degree  of  banking  skill  and  a  much  higher  degree 
of  care  and  attention  than  savings  banks,  since  the  ele- 
ment of  human  judgment  predominates  in  the  business 
bank  in  a  much  larger  measure  than  it  does  in  the  savings 
bank.  The  savings  bank  produces  but  few  great  bankers, 
while  the  business  bank  must  needs  have  them  as  a 
practical  necessity. 

The  Routine  of  the  Savings  Bank. 

The  bulk  of  the  work  in  a  savings  bank  consists  in 
making  the  daily  credits  and  charges  to  the  various  ac- 
counts, which  process  is  attended  by  more  detail  than 
similar  work  in  the  bank  of  discount.  While  savings 
banks  do  not  handle  as  many  individual  items  as  banks 
of  discount,  the  work  is  done  with  more  ceremony. 
We  can  best  see  the  contrast  by  following  a  deposit 
through  its  course  in  both  institutions.  Banks  of  dis- 
count use  names  as  the  key  to  transactions,  while  sav- 
ings banks  use  account  numbers.  When  an  account  is 
opened  in  a  savings  bank,  a  serial  number  is  given  the 
depositor,  represented  by  the  pass  book,  and  the  ledger 
account  corresponds.  In  making  a  deposit,  a  ticket 
is  made  out  with  the  account  number,  name  and  amount. 
The  name  is  used  to  verify  the  correctness  of  the  account 
number.  The  teller  enters  the  amount  on  his  cash  sheet 
for  proving  purposes,  and  the  ticket  goes  to  the  distri- 
bution clerk.  Inasmuch  as  accounts  are  grouped,  so 
that  any  one  group  can  be  proven  by  itself,  the  amount 
of  debits  and  credits  on  each  group  must  be  accurately 
kept.     The  distribution  clerk  has  a  sheet  for  each  group 


SAVINGS  BANKS  223 

of  accounts,  and  enters  the  amount  on  the  proper  sheet 
by  number,  name  and  amount,  with  a  blank  column 
left  between  the  name  and  amount.  The  posting  clerk 
then  posts  the  amount  to  the  ledger  account,  which  may 
be  a  card  ledger,  loose  leaf,  or  bound  book.  The  balance 
is  extended  at  each  transaction.  When  postings  are  all 
made  the  checking  clerk  takes  the  distribution  sheets, 
turns  to  the  ledger  number  and  enters  whatever  he  finds 
posted  as  of  that  date.  The  amount  column  has  been 
detached  from  the  main  sheet  and  he  has  no  guide  but 
the  number  and  name.  When  the  sheet  has  been 
checked,  he  makes  a  total,  which  must  agree  with  the 
amount  on  the  detached  stub,  thus  showing  that  all 
postings  have  been  made,  and  to  the  right  accounts. 
Withdrawals  are  put  through  the  same  process. 

In  the  bank  of  discount,  the  deposit  is  simply  listed 
as  it  leaves  the  tellers  cage,  as  to  amount,  given  to  the 
bookkeeper  to  post,  and  then  to  the  journal  clerk  who 
lists  it  under  its  proper  alphabetical  letter  by  amount 
only,  when  the  ticket  is  ready  for  filing.  In  many  banks 
the  postings  are  now  made  by  machines  that  print  the 
date  and  amount  in  the  proper  columns,  and  add  or 
subtract  the  amount  from  the  previous  balance  and 
extend  the  new  balance,  automatically.  The  individual 
items  are  not  checked  back,  unless  there  is  an  error. 
The  work  is  proven  by  comparing  the  balances  on  the 
ledgers  with  the  balances  on  the  statement  sheets,  and 
the  same  work  having  been  done  on  each,  the  results 
must  be  alike.  In  many  commercial  banks,  a  trial 
balance  of  all  accounts  is  taken  daily,  which  must  tally 
with  the  general  ledger.  Such  a  process  would  be 
physically  impossible  in  a  savings  bank ;  for  while  a  bank 
of  discount  with  two  million  deposits  would  have  about 
two  thousand  accounts,  a  savings  bank  of  the  same  size 
would  have  three  or  four  times  as  many.     The  savings 


224  THE  BUSINESS  MAN  AND  HIS  BANK 

bank  could  operate  with  three  men;  the  bank  of  discount 
would  require  ten. 

The  savings  bank  trial  balance  consists  of  making  a 
total  of  all  accounts,  group  by  group,  which  must  agree 
with  the  controlling  figures  on  the  general  ledger.  All 
well  managed  savings  banks  keep  their  accounts  in  per- 
fect proof,  and  these  tests  are  usually  made  half-yearly. 

The  computation  of  the  interest  on  each  account  is  a 
lengthy  process  and  is  one  of  the  bookkeeping  events  of 
the  year.  Each  account  must  be  examined  and  the 
interest  computed  according  to  the  rules  of  the  bank. 
It  is  then  posted,  the  balance  extended,  and  entered  on 
the  pass  books  as  presented. 


CHAPTER  XXIV 
BANK   EXAMINATIONS 

The  reports  which  a  bank  makes  to  the  supervising 
officials  are  similar  to  the  statements  which  business 
men  make  for  the  purpose  of  obtaining  credit.  They  are 
the  bank's  estimate  of  itself.  They  are  unaudited 
statements,  and  therefore  as  reliable  as  the  bank  officials 
making  them. 

The  principal  safeguard  of  banking  is  not  the  periodical 
statements,  but  the  frequent  examinations  by  the  bank 
examiners.  These  are  more  nearly  in  the  nature  of  an 
audit,  and  are  on  the  whole  reliable. 

What  the  Bank  Examiner  Does. 

Bank  examinations  are  for  two  purposes:  to  protect 
the  public  by  keeping  the  bank  in  a  state  of  healthy 
solvency,  and  to  protect  the  managing  officials  from 
themselves,  thereby  safeguarding  the  interests  of  both 
stockholders  and  depositors.  If  it  were  not  for  the 
watchful  care  exercised  over  banks,  the  failures  which  are 
now  so  rare  would  be  common,  for  even  though  some 
men  w^ould  be  careful  and  conservative,  examinations  or 
no  examinations,  the  great  mass  of  bank  managers  could 
not  be  trusted  to  operate  on  the  principle  that  they 
should  be  as  good  children  while  the  teacher  is  out  of  the 
room,  as  when  teacher  is  at  her  desk. 

The  enviable  record  that  banking  has  made  in  this 
country  during  the  trying  period  of  the  war,  and  before, 
and  the  immunity  from  failures,  have  been  due  largely  to 
the  watchful  oversight  given  to  these  institutions  by 
the  state  and  national  authorities. 

15  225 


226  THE  BUSINESS  MAN  AND  HIS  BANK 

The  scope  of  a  bank  examination  depends  largely  upon 
the  examiner  and  the  jurisdiction  under  which  he  works 
In  some  states  the  examination  is  lax  and  in  others  rigid. 
In  national  banks  it  depends  largely  upon  the  examiner 
himself.  But  as  a  rule  the  country  over,  these  tests  may 
be  said  to  be  reasonably  rigid. 

The  writer  is  familiar  with  the  New  York  examina- 
tions and  also  those  in  the  national  banking  system. 
The  former  is  more  exhaustive  and  may  well  be  taken 
as  a  model  for  all  the  rest.  Let  us  see  how  far  the 
examiner  goes  in  making  his  periodical  test,  which  as  a 
rule  is  made  twice  a  year  without  previous  notice. 

The  Bank  Examiner  at  Work. 

He  (or  they)  usually  makes  appearance  at  the  close 
of  the  day  or  before  the  opening  of  the  doors,  so  that 
the  cash  may  be  counted  before  it  has  been  disturbed  or 
before  it  is  put  away  for  the  night.  The  cash  held  in 
the  reserve  chests  is  sealed  until  proven,  and  likewise  all 
compartments,  drawers  and  files  containing  assets  of 
the  bank,  such  as  bonds,  notes,  mortgages,  collateral 
loans,  etc. 

After  cash  has  been  proven  he  verifies  the  bond  hold- 
ings, by  actual  count,  and  any  such  assets  held  outside 
the  bank  for  any  purpose  must  be  accounted  for  by 
proper  receipts.  The  market  value  of  these  is  com- 
puted in  making  up  the  final  report,  to  show  the  bank's 
actual  condition  on  a  selling  out  basis. 

The  notes  secured  by  collateral  are  then  examined: 
(a)  To  see  that  the  note  is  in  proper  form;  (b)  that  the 
security  is  ample  and  good;  (c)  that  it  is  in  proper  shape 
to  sell  if  the  borrower  defaults  in  pa;ymient. 

All  notes  discounted  are  examined  and  totaled.  The 
name  of  each  borrower  is  taken  on  a  card  with  details. 
This  card  is  filed  with  the  Banking  Department,  and 


BANK  EXAMINATION  227 

at  the  next  examination,  the  fate  of  the  note  is  recorded. 
If  reductions  are  made,  these  are  noted.  If  it  is  renewed 
from  time  to  time  without  payment,  it  is  ultimately 
classed  as  slow  and  finally  as  doubtful.  Thus  every 
loan  is  watched  from  its  birth  to  its  extinction  and  due 
action  taken. 

Mortgages  if  any  are  examined  to  see  that  the  papers 
are  complete,  the  mortgage  properly  recorded,  appraisal 
made  by  the  bank,  insurance  in  force  and  taxes  paid. 

Real  estate  held  by  the  bank  must  be  evidenced  by 
the  deeds  running  to  the  bank  and  likewise  recorded. 

The  ledger  balances  are  run  up  on  the  adding  machine 
and  must  agree  with  the  general  ledger. 

Outstanding  certificates  of  deposit  must  be  shown  to 
exist  by  the  uncancelled  stubs. 

The  accounts  with  other  banks  are  reconciled. 

The  minutes  are  examined  to  see  that  the  meetings 
are  held  properly  and  attended  by  the  board  members. 

The  outstanding  stock  is  proven  from  the  stock  book. 

After  all  these  details  are  properly  verified  the  report 
is  made  up  and  submitted  to  the  Department  with 
recommendations.  Frequently  and  in  many  cases 
always,  the  board  members  are  brought  together  and 
the  notes  gone  over,  so  that  the  joint  opinion  of  the 
paper  may  be  obtained.  It  can  readily  be  seen  that 
unless  there  is  gross  fraud  in  the  bank  and  irregularities 
carefully  concealed,  the  results  shown  by  the  examiner 
must  be  accepted  as  a  true  audit.  By  this  process  the 
banks  are  kept  in  a  condition  of  good  health,  slow  loans 
brought  into  a  condition  of  activity,  and  all  doubtful 
assets,  in  time,  eliminated  through  charging  off. 

There  are  of  course  jurisdictions  where  more  laxness 
obtains  than  in  New  York,  but  this  is  examination  par 
excellent  and  none  better  can  be  found  anywhere. 

Many  banks  are  now  employing  public  auditors  to  ex- 


-228  THE  BUSINESS  MAN  AND  HIS  BANK 

amine  the  bank  at  stated  times.  These  auditors  make  a 
very  thorough  test,  inasmuch  as  the  element  of  time  does 
not  enter.  They  take  all  the  time  they  need  to  do  a 
good  job.  Besides  verifying  the  assets  that  can  be 
checked  from  within  the  bank,  they  also  verify  the 
loans  by  communicating  with  the  borrower.  He  is 
asked  to  verify  the  amount  of  the  loan  and  the  collateral, 
if  any.  They  also  pay  particular  attention  to  the  liabili- 
ties. A  bank  can  be  swindled  in  many  ways.  It  is 
sometimes  done  by  taking  the  assets  and  as  often  by 
falsifying  the  liabilities.  These  auditors  therefore  check 
the  amounts  due  the  various  depositors  by  statements 
to  them,  the  verifications  being  returned  to  the  auditors 
direct.  These  examinations  sometimes  take  the  place 
of  the  directors'  examinations,  and  in  some  cases  are 
supplemental  thereto. 


CHAPTER  XXV 

THE  FEDERAL   RESERVE   BANK   AND   ITS   RELA- 
TION TO  BUSINESS 

One  of  England's  leading  bankers  has  characterized 
the  Federal  Reserve  Bank  as  the  '' world's  foremost 
banking  system."  It  is  an  impartial  judgment  from 
long  range  observation.  We  who  are  close  to  it,  are 
perhaps  too  near  to  get  the  right  perspective,  and  too 
near  to  appreciate  its  mighty  force  for  good. 

The  war  had  hardly  broken  out  when  the  Federal 
Reserve  Banks  opened  their  doors.  It  was  an  experi- 
ment in  banking,  an  untried  thing,  a  combination  of 
ideas  and  principles  taken  from  the  banking  systems 
of  the  world  after  close  study  by  experts  as  to  their 
adaptibility  to  American  business  methods.  How  well 
the  system  has  worked  cannot  be  told  in  a  brief  space 
and  can  only  be  fully  realized  by  a  close  study  into  its 
operations.  When  it  is  considered  that  we  have  gone 
through  the  most  trying  time  in  the  world's  history 
without  a  financial  panic;  that  the  machinery  of  finance 
has  moved  smoothly  month  in  and  month  out,  with  the 
burden  of  financing  the  world  on  our  hands,  then  and 
then  only  must  we  admit  that  some  new  and  powerful 
force  has  been  at  work  in  our  midst. 

Putting  the  five  Liberty  Loans  "over  the  top"  would  in 
itself  be  a  great  achievement.  To  round  out  an  organi- 
zation that  could  reach  into  every  hamlet  and  home  and 
store  and  office  and  factory,  and  enlist  the  financial 
support  of  millions  of  people  heretofore  unacquainted 
with  the  buying  of  bonds  would  at  any  time  be  a  great 
feat  of  generalship;  but  the  war  financing  has  merely 

229 


230  THE  BUSINESS  MAN  AND  HIS  BANK 

been  an  incident  in  the  day's  work — the  greater  task 
has  been  to  mobihze  the  financial  strength  of  the  country 
and  keep  the  situation  under  control. 

The  Federal  Reserve  Banks  have  been  the  great 
balance  wheel  of  the  war,  the  automatic  throttle,  to 
increase  or  decrease  the  speed  of  the  financial  engine 
as  the  needs  required. 

Federal  Reserve  Banks  Create  Confidence. 

The  greatest  service  of  these  banks  to  the  public  at 
large  has  been  in  the  role  of  a  creator  of  confidence. 
We  somehow  felt  that  a  master  hand  was  at  the  helm 
and  that  all  would  be  well.  Under  the  old  regime  every 
bank  was  solicitous  of  its  own  condition,  hoarded  money 
to  be  in  position  to  meet  an  unexpected  demand  on  the 
part  of  its  clients,  and  instead  of  helping  a  bad  situation 
made  it  worse  by  their  very  fears.  Take  the  panic 
of  1907  for  example.  Conditions  were  fundamentally 
sound,  but  suddenly  banks  began  to  get  frightened. 
They  felt  that  the  supply  of  money  would  not  be  ade- 
quate, and  so  tightened  up  on  loans  and  locked  money 
in  their  vaults  in  unheard  of  quantities  until  the  supply 
was  so  curtailed  that  business  was  crippled  for  want 
of  ready  money  to  move  it.  There  was  not  enough  money 
to  go  round,  and  no  w^ay  by  which  it  could  be  quickly 
created.  Individuals  like  the  banks  began  to  get  fright- 
ened and  they  too  hoarded.  It  was  no  uncommon 
thing  for  a  bank  to  hand  out  money  to  its  customers, 
only  to  have  it  taken  and  placed  in  the  bank's  own  safe 
deposit  vaults;  and  every  dollar  so  locked  up  injured 
the  cause  of  business,  as  hoarding  always  does. 

In  the  World  War  we  have  had  no  such  distrust; 
for  while  certain  individuals  have  hoarded,  it  has  in  no 
sense  been  an  epidemic.  And  when  money  has  been 
needed  the  Federal  Reserve  Banks  have  been  able  to 


THE  FEDERAL  RESERVE  BANK  231 

furnish  it.  There  has  at  no  time  been  a  dearth  of  cir- 
culating media. 

Shortly  after  the  war  broke  out  the  Federal  Reserve 
Banks  began  to  accumulate  and  conserve  the  gold  supply 
of  the  country.  The  coin  was  held  back  from  circulation 
and  the  ''yellowbacks" — representative  of  gold,  were 
withheld  from  circulation  by  the  banks  and  sent  to  the 
Federal  Reserve  Banks,  so  that  in  the  course  of  time  we 
as  a  nation  had  assembled  the  largest  stock  of  gold 
the  world  ever  saw  under  one  flag.  Having  the  gold,  we 
had  the  foundation  for  sound  currency,  the  Federal 
Reserve  Banks  holding  at  times  from  60  to  80  per  cent, 
of  their  outstanding  obligations  in  the  yellow  metal. 
The  meaning  of  this  was  that  they  could  pay  off  all 
obligations  assumed  by  them  to  the  extent  of  almost 
dollar  for  dollar  in  gold. 

The  masterly  handling  of  the  finances  of  the  nation, 
and  the  confidence  created  by  a  continuation  of  the  nor- 
mal functioning  of  the  banks,  has  been  the  underlying 
reason  for  our  freedom  from  financial  and  business  panics 
during  the  past  five  years.  Just  as  long  as  business 
moves  in  its  accustomed  channels,  loans  and  discounts 
are  secured  from  the  banks  as  in  normal  times,  currency 
in  plenty  is  available  for  commercial  purposes,  and  faith 
prevails  in  the  banking  system  under  which  we  live,  just 
so  long  will  we  be  free  from  periods  of  unrest  and  doubt 
as  to  the  future;  and  being  free  to  spend  our  efforts  in 
constructive  work  and  not  destructive  worry,  business 
will  continue  to  perform  its  necessary  functions  for  the 
public  good.  But  without  confidence,  the  machine 
breaks  down,  and  panic  follows;  for  panics  are  merely 
lack  of  confidence  come  to  a  head.  In  all  the  doubt  that 
a  great  war  creates  as  to  the  final  outcome,  and  all  the 
hardship  and  waste  that  follows  in  its  train,  unless  the 
people  trust  the  banks  to  handle  the  financial  end  satis- 


232  THE  BUSINESS  MAN  AND  HIS  BANK 

factorily,  financial  and  industrial  panic  follows,  which 
adds  to  the  worries  incident  to  war  a  load  which  business 
is  unable  to  bear  and  chaos  follows.  It  is  doubtful 
if  we  as  a  nation  would  have  survived  the  shock  of  the 
war  had  not  the  Federal  reserve  banks  been  in  operation 
to  steady  the  ship  of  state  while  it  was  crossing  the 
dangerous  seas  of  1914-19.  Certain  it  is  that  we  would 
not  have  come  through  with  honor  and  credit,  and 
reached  a  point  in  the  world's  financial  scheme  that 
makes  us  the  creditor  nation  of  the  world  and  its  most 
mighty  financial  factor.  Just  how  this  has  been  ac- 
complished, history  has  yet  to  tell. 

Panics. 

Prior  to  the  advent  of  the  Federal  Reserve  System 
we  had  a  panic  about  every  ten  years,  when  business 
was  disrupted,  labor  unsettled,  the  people  frightened, 
the  banks  weakened  and  chaos  brought  about  in  the  com- 
mercial world.  We  have  had  no  such  experience  under 
the  Federal  Reserve  System,  and  any  instrumentality 
that  can  prevent  a  panic,  at  the  slightest  sense  of  danger, 
is  worthy  of  being  classed  a  public  benefactor. 

The  chief  aim  of  the  Federal  Reserve  System  is  to  co- 
ordinate the  banking  interests  of  the  country  and  get 
them  working  together  for  the  good  of  all.  Instead  of 
pulling  apart  they  now  pull  together.  They  act  as  a 
unit.  They  move  in  one  direction  rather  than  in  thirty 
thousand  directions,  and  with  thirty  thousand  interests 
to  consider. 

The  proposition  would  be  the  same  if  each  citizen 
were  to  have  his  own  coal  supply  and  feel  that  when 
this  was  gone  no  more  could  be  had  at  any  price,  in 
contrast  with  the  condition  where  each  one  knows  for  a 
certainty  that  he  can  get  all  the  coal  he  needs  from  a 
central  supply  depot.     Imagine  the  feeling  of  security 


THE  FEDERAL  RESERVE  BANK  233 

that  bankers  now  have  in  contrast  with  the  old  feeUng 
of  uncertainty.  Formerly  the  banks  held  certain  bonds 
in  their  vaults  as  their  ''anchor  to  the  windward." 
In  case  their  depositors  made  unusual  demands,  they 
would  sell  these  bonds  in  Wall  Street  to  meet  the  call  for 
money.  This  meant  a  loss,  and  sometimes  could  not  be 
done  except  at  ruinous  pri  ces.  Under  the  new  system,  the 
banker  knows  that  as  long  as  he  has  sound  paper  in  his 
portfolio,  he  can  turn  it  into  money  within  a  time 
incredibly  short.  If,  for  instance,  your  bank  were  to 
need  half  a  million  tomorrow,  all  it  would  have  to  do 
would  be  to  take  half  a  million  of  its  notes  discounted 
(that  conform  to  the  requirements  of  the  Federal  Re- 
serve Board)  and  as  quickly  as  it  could  get  to  the  nearest 
Federal  Reserve  Bank  and  back,  it  would  have  money — • 
real  money,  to  meet  any  demand  made  upon  it.  At  the 
same  time,  it  knows  that  as  long  as  it  makes  safe  loans 
it  may  keep  on  loaning,  knowing  it  can  turn  its  loans 
over  to  the  Federal  Reserve  Bank  by  the  rediscount 
privilege  accorded  it.  Therefore  the  business  man 
knows  for  certain  just  where  he  stands,  and  as  long  as  he 
does  sound  business  and  takes  sound  paper  he  can  con- 
tinue to  borrow. 

Defects  in  the  Old  System. 

The  banking  system  that  breaks  down  at  a  critical 
time  is  a  menace  to  the  well  being  of  the  business  world, 
just  as  a  bridge  that  collapses  at  an  unusual  strain  is  a 
menace  to  the  public.  Only  that  system  is  safe  which 
continues  to  perform  its  functions  in  season  and  out, 
in  time  of  panic  as  well  as  in  times  of  peace. 

It  has  long  been  an  accepted  fact  in  this  country  that 
our  banking  system  was  weak;  that  it  collapsed  at  the 
most  critical  times;  that  it  worked  smoothly  only  as 
long  as  business  conditions  were  normal  and  no  unusual 


234  THE  BUSINESS  MAN  AND  HIS  BANK 

happenings  occurred  to  disturb  the  finances  of  the 
country.  But  just  as  soon  as  a  great  fire  occurred, 
or  war  broke  out,  or  the  crops  were  short,  or  an  era  of 
speculation  came  about,  our  banking  machinery  ceased 
to  function,  and  the  whole  country  was  thrown  into  a 
condition  of  financial  chaos.  As  a  result  of  either 
preparing  for  possible  happenings  or  recovering  from 
panicy  conditions,  we  were  in  an  unsettled  condition 
most  of  the  time. 

Prior  to  the  advent  of  the  Federal  Reserve  System 
there  were  several  danger  spots  in  American  financial 
methods  that  caused  most  of  the  trouble.  First,  there 
were  approximately  thirty  thousand  banks,  each  a  dis- 
tinct entity,  operated  for  its  own  profit,  concerned  mostly 
with  its  own  welfare,  jealous  of  its  own  condition  and 
looking  to  its  own  safety,  whatever  the  cost  may  have 
been  to  the  country  at  large  or  to  the  business  interests. 
The  business  of  these  banks  was  mostly  local.  Their 
interests  were  home  interests.  In  a  few  instances  the 
banks  of  a  city  w^ere  organized  into  clearing  houses,  in 
the  hope  of  obtaining  united  effort  and  concerted  action ; 
but  otherwise  it  was  ''each  bank  for  itself." 

At  the  slightest  sign  of  danger,  as  the  banker  saw  it, 
these  banks  would  curtail  loans,  hoard  cash,  and  in  other 
ways  seek  to  safeguard  themselves.  In  the  nature  of 
things  they  could  not  work  together,  because  there  was 
no  common  interest  and  no  common  leadership.  The 
country  banks  threw  the  burden  upon  their  city  corres- 
pondents and  these  worked  together  as  best  they  could 
under  the  existing  laws  and  with  the  crude  machinery 
then  at  hand.  The  case  would  be  precisely  the  same 
if  each  householder  sought  to  protect  his  own  property 
from  fire  and  theft,  and  cared  little  what  became  of  his 
neighbor's,  forgetting  that  his  interests  and  his  neigh- 
bor's are  closely  allied. 


THE  FEDERAL  RESERVE  BANK  235 

Scattered  Reserves. 

In  the  second  place  these  banks  were  each  required 
to  maintain  reserves,  and  each  did  so  as  a  matter  of 
necessity  and  business  prudence.  Part  of  these  reserves 
was  in  their  own  vaults  and  part  in  depositary  banks. 
The  latter  amount  consisted  of  balances  actually  created 
in  the  depositary  banks,  and  in  checks  sent  to  the  latter 
for  collection  but  which  were  considered  as  a  cash  de- 
posit as  soon  as  put  in  the  mails.  To  illustrate:  A 
bank  in  Syracuse,  New  York,  would  be  required  to  carry 
a  reserve  of  15  per  cent,  or  a  million  dollars.  One  third 
of  this  would  be  in  cash,  and  the  balance  could  be  in 
banks  in  Albany.  Part  of  the  Albany  balances  con- 
sisted of  checks  on  banks  in  New  England,  deposited 
with  the  Albany  bank  for  collection,  but  considered  as  a 
cash  deposit  by  the  SjTacuse  bank.  The  Albany  bank 
must  in  turn  keep  a  reserve  of  25  per  cent,  of  its  deposits, 
but  one  half  could  be  in  New  York  banks.  As  soon  as 
the  checks  were  forwarded  to  New  York,  the  Albany 
bank  would  consider  the  amount  as  its  reserve.  The 
New  York  bank  must  keep  all  its  reserve  in  its  own  vault, 
the  proportion  being  25  per  cent,  of  its  deposits.  Until 
these  checks  were  collected  and  reduced  to  cash,  the  only 
real  reserve  behind  the  deposits  of  the  bank  in  Syracuse 
was  the  cash  on  hand,  the  proportion  of  the  cash  in  Al- 
bany bank  and  the  proportion  of  the  cash  in  the  New 
York  bank.  This  reduced  the  real  reserve  to  a  fraction 
of  the  supposed  15  per  cent. 

These  checks  in  process  of  collection  amount  to 
hundreds  of  millions,  and  are  called  the  "float"  in  bank- 
ing circles — meaning  the  checks  that  are  in  the  mails 
for  collection.  It  can  readily  be  seen  that  a  check  is 
not  money.  Until  it  is  paid,  it  is  merely  an  order  on  a 
bank,  which  may  or  may  not  be  honored. 


23G  THE  BUSINESS  MAN  AND  HIS  BANK 

Hoarding. 

In  the  third  place  whenever  a  cloud  appeared  on  the 
financial  horizon  banks  would  begin  to  accumulate  cash 
in  their  own  vaults.  They  were  fearful  that  they  might 
not  be  able  to  obtain  it  when  needed  and  so  built  up 
their  own  supply.  This  feature  may  be  illustrated  by  a 
town  wherein  each  householder  has  a  pail  of  water  for 
fire  purposes,  or  a  number  of  pails,  which  he  guards 
jealously,  rather  than  a  reservoir  of  water  connected 
by  pipes  that  touch  every  part  of  the  community.  And 
instead  of  building  up  the  community  supply  of  water 
in  one  place,  each  individual  endeavors  to  create  a  small 
reservoir  for  himself,  to  the  detriment  of  all.  Thus  the 
banks,  instead  of  having  a  reservoir  of  money,  each  had 
a  little  supply,  which  worked  out  exactly  as  would  the 
water  pail  in  case  of  a  conflagration. 

The  banks  also  had,  as  above  noted,  what  they 
thought  was  a  secondary  reserve,  composed  of  bonds  of 
various  kinds,  and  loans  on  call  in  the  money  markets. 
The  city  banks,  when  in  funds,  would  place  their  deposits 
out  as  loans  on  call,  secured  by  stock  exchange  collateral. 
In  the  event  that. money  should  be  needed,  these  loans 
were  called,  or  securities  sold,  thus  increasing  the  danger. 
The  Syracuse  bank,  needing  funds  for  its  local  require- 
ments, would  draw  on  Albany,  and  Albany,  to  replenish 
its  reserves,  would  draw  upon  New  York.  New  York 
would  in  turn  call  loans,  and  if  they  could  not  be  paid, 
panic  ensued.  Witness  the  panic  of  1907.  The  supply 
of  gold  and  currency  was  plentiful,  but  money  went  to  a 
premium,  and  in  some  places  was  almost  impossible  to 
obtain,  because  each  bank  was  hoarding  for  itself,  and 
locking  money  up  rather  than  putting  it  into  the  channels 
of  trade. 

For  the  same  reason  that  a  water  system  has  been 
found  superior  to  the  old  fire  cisterns  scattered  through- 


THE  FEDEKAL  RESERVE  BANK  237 

out  the  town,  a  central  reservoir  of  bank  balances — 
cash,  has  been  found  necessary  to  protect  the  business 
and  banking  interests  against  panics.  Money  to  be  of 
service  must,  like  water,  be  concentrated — mobilized  if 
you  please,  like  an  army.  It  must  also  be  moved  about 
where  needed.  It  must  go  to  the  danger  spots  quickly 
and  at  little  cost.  If  a  bank  knows  it  can  get  money 
at  any  time,  under  all  conditions,  it  will  not  hoard,  no 
more  than  will  a  householder  hoard  water  if  he  knows 
he  can  turn  a  tap  and  get  it.  And  if  the  financial  in- 
terests know  they  can  send  money  at  any  time  to  any 
place  where  it  is  required,  they  will  be  in  the  position 
of  a  well  equipped  fire  department^ — efficient  in  putting 
out  fires. 

Government  Money. 

The  fourth  danger  spot  was  due  to  the  fact  that  the 
Treasury  of  the  United  States  received  large  deposits  of 
money  for  taxes  and  government  payments  and  locked 
them  up  in  the  various  sub-treasuries.  When  money 
became  scarce,  these  deposits  were  released  to  the 
banks,  the  proportion  depending  upon  politics  and  the 
whim  of  the  administration.  The  deposits  went,  not 
necessarily  where  they  were  most  needed,  but  where  the 
head  of  the  department  thought  they  ought  to  go; 
and  he  was  often  influenced  by  personal  and  political 
reasons. 

Our  Inelastic  Currency. 

Fifth:  We  have  in  this  country  seasonal  demands  for 
money — actual  cash.  This  comes  mainly  from  the 
crops  in  the  west  and  southwest.  When  the  crops  are 
being  marketed,  the  returns  are  sent  to  New  York  and 
other  large  cities,  there  to  be  employed  in  stock  exchange 
loans,  for  which  there  is  always  a  market  at  some  rate. 


238  THE  BUSINESS  MAN  AND  HIS  BANK 

Banks  find  it  necessary  to  get  into  this  market  if  they  are 
to  obtain  any  return  on  short  time  deposits.  When  the 
crops  are  being  planted  and  harvested  in  the  spring, 
summer  and  early  fall,  these  deposits  are  withdrawn 
in  cash.  The  banks  should  therefore  be  in  position 
to  obtain  cash  as  needed  for  such  purposes,  and  our 
money  supply  should  expand  and  contract  as  the  needs 
of  business  require,  just  as  the  supply  of  any  other  com- 
modity expands  and  contracts  with  the  call  for  it. 

At  times  we  had  too  much  money  and  at  times  not 
enough,  due  to  the  fact  that  our  money  supply  depended 
upon  the  profit  that  ensued  from  the  issue  of  bank  notes. 
Under  the  National  Banking  Act  all  national  banks 
were  required  to  invest  a  portion  of  their  capital  in  Gov- 
ernment bonds,  at  two  and  three  per  cent.  These  bonds 
were  generally  at  a  premium.  In  return,  the  banks  could 
lodge  these  bonds  with  the  Treasury  at  Washington  and 
obtain  the  par  amount  in  National  Bank  Notes.  The 
amount  so  received  could  be  loaned  out  at  the  current 
rate  of  interest  and  the  bank  would  therefore  draw  in- 
terest from  two  places,  the  bonds  and  the  loans.  If 
the  premium  on  the  bonds  was  high,  the  net  return  would 
of  course  be  less  than  when  the  premium  was  low.  The 
average  return  on  the  two  per  cent,  bonds  used  as  the 
basis  of  note  issue  was  around  1}^  per  cent.  A  bank 
lending  this  money  out  at  6  per  cent,  would  therefore 
receive  7}^  per  cent,  on  the  amount  invested  in  bonds. 
Some  banks  took  the  required  amount  only,  while  others 
took  out  circulation  in  large  amounts.  The  amount 
of  paper  money  was  not  based  upon  the  country's  needs, 
but  upon  the  policy  of  the  banks  and  the  price  of  bonds, 
illogical  and  dangerous  as  events  proved. 

The  process  of  issuing  notes  was  so  cumbersome, 
that  only  under  severe  necessity  did  the  banks  increase 
their   circulation,    and    the    delay    often   increased    the 


THE  FEDER.\L  RESERVE  BANK  239 

unrest;  while  the  process  of  retiring  excess  money  was 
so  slow  that  it  often  became  a  source  of  danger  because 
of  the  excess  supply.  When  the  banking  machinery 
broke  down,  as  it  often  did,  all  sorts  of  expedients  were 
resorted  to  to  overcome  the  trouble,  such  as  clearing 
house  certificates,  checks  used  as  currency,  practical 
suspension  of  cash  payments,  etc.,  all  of  which  went  to 
prove  that  we  had  no  real  banking  system,  no  concerted 
action,  no  governor  to  the  financial  engine.  In  such 
times  the  Treasury  came  to  the  rescue  as  best  it  could 
under  the  existing  laws,  but  the  relief  was  unscientific 
and  a  makeshift  only. 

No  Rediscount  System. 

Sixth:  There  was  another  chief  defect,  namely,  the 
lack  of  a  rediscount  system,  or  to  put  it  differently,  a 
place  where  banks  could  rediscount  their  loans  and  turn 
them  into  money  or  its  equivalent.  This  was  done  by 
the  city  banks  for  their  country  correspondents,  but 
there  was  no  place  where  the  city  bank  could,  in  turn,  do 
the  same  thing.  There  was  a  time  when  to  rediscount 
any  of  the  note  holdings  of  a  bank  was  a  sign  of  danger; 
and  yet  it  might  simply  indicate  that  the  bank  had  more 
call  for  money  than  it  could  take  care  of,  or  had  over- 
loaned  and  needed  to  ''cash  in"  some  of  its  loans. 
Banks,  like  business  men  often  need  to  borrow,  and  dur- 
ing the  war,  they  did  so  freely  at  the  Federal  Reserve 
Banks,  as  their  statements  would  show.  And  some  of 
these  are  the  largest  and  strongest  banks  of  the  country. 
Rediscounting  may  now  be  said  to  be  a  common  cus- 
tom among  the  banks,  large  and  small,  and  part  of  their 
regular  operations. 

The  evil  of  indu-ect  routing  of  checks  to  avoid  the 
exchange  charges  imposed  by  certain  banks  and  clearing 
houses  was  also  a  danger  and  resulted  in  a  large  amount 


240  THE  BUSINESS  MAN  AND  HIS  BANK 

of  "float,"  estimated  at  over  three  hundred  milUons 
constantly  in  the  mails.  Checks  were  not  sent  home  for 
payment  in  the  quickest  possible  time,  but  by  any  route 
that  would  be  cheapest.  Local  checks  were  promptly 
collected,  but  foreign  items  were  traveling  around — 
"joy  riding"  as  it  were,  to  escape  a  tax.  These  checks 
constituted  a  large  part  of  the  reserves  of  the  banks. 

Lastly,  we  were  paying  the  London  banks  enormous 
sums  for  financing  the  foreign  trade  of  the  United  States. 
Inasmuch  as  American  banks  were  not  well  known  to 
the  other  banks  of  the  world,  while  London  had  become 
the  financial  centre  of  the  world  and  a  credit  on  any  of 
her  banks  acceptable  the  world  over,  we  were  badly 
handicapped  in  all  matters  having  to  do  with  foreign 
trade.  Our  banks  could  not  operate  foreign  branches, 
and  could  only  play  a  part  in  the  world's  game  of  trade 
through  their  London  correspondents.  The  Federal 
Reserve  System  came  into  being  because  of  and  to 
remedy  all  these  defects  of  our  old  banking  regime. 

Having  seen  the  defects  of  the  old  system,  we  are 
prepared  to  review  the  Federal  Reserve  System  to  see 
how  these  evils  are  cured. 

Essential  Features  of  the  Federal  Reserve  Bank. 

A  technical  discussion  of  the  Federal  Reserve  Bank 
would  be  out  of  place  here.  It  will  suffice  to  get  a 
practical  summary  of  its  organization,  purpose  and  plan 
of  operation.  It  is  a  bank  of  hanks.  Individuals  have 
nothing  to  do  with  the  Federal  Reserve  Banks.  They 
may  not  become  stockholders  and  they  cannot  open 
accounts  with  it.  All  the  stock  is  owned  by  banks. 
Every  national  bank  must,  and  state  banks  and  trust 
companies  may,  subscribe  an  amount  equal  to  6  per  cent, 
of  their  capital  and  surplus  to  the  capital  of  the  Federal 
Reserve  Bank,  one  half  of  which  has  been  paid  in  and 


THE  FEDERAL  RESERVE  BANK  241 

the  balance  is  subject  to  call.  (This  will  probably  never 
be  done) .  Therefore  the  banks  own  the  Federal  Reserve 
Banks.  The  identity  of  each  bank  is  unimpaired  and  it 
still  remains  a  law  unto  itself,  continuing  its  practice  of 
building  up  its  community  and  itself — the  keynote  of 
American  banking  success.  The  Federal  Reserve  Sys- 
tem unites  these  banks  in  purpose  and  plan  of  opera- 
tion. It  welds  them  into  a  united,  composite  body.  It 
''federates"  them,  to  use  Dr.  Kemmerer's  expression. 
The  Federal  Reserve  Banks  operate  through  the  indi- 
vidual members.     It  is  the  tree;  they  are  the  branches. 

The  United  States  has  been  divided  into  12  Federal 
Reserve  Districts,  each  with  its  own  bank,  a  part  of  the 
national  system.  A  list  of  these  banks  will  be  found 
below.*  Several  of  them  have  branches.  The  adminis- 
trative control  is  lodged  with  the  Federal  Reserve  Board 
consisting  of  seven  members  and  having  its  headquarters 
in  Washington.  These  are  appointed  by  the  president 
of  the  United  States  for  a  term  of  ten  years,  except  the 
secretary  of  the  treasury  and  comptroller  of  the  currency 
exofficio.  This  board  has  general  supervision  of  all  the 
banks  and  is  the  central  power. 

Administrative  Control. 

The  administrative  control  of  a  Federal  Reserve  Bank 
is  in  the  member  banks,  each  bank,  irrespective  of  its 
size,  having  one  vote  for  directors.  The  banks  of  each 
district  are  classified  as  to  capital  and  surplus  into  three 
groups,  by  the  Federal  Reserve  Board.     The  intent  is  to 

*  Federal  Reserve  Banks  are  now  located  in:  New  York,  Boston, 
Philadelphia,  Cleveland,  Richmond,  Atlanta,  Chicago,  St.  Louis,  Minne- 
apolis, Kansas  City,  Dallas,  San  Francisco.  The  New  York  bank  has 
a  branch  at  Buffalo,  the  Richmond  bank  at  Baltimore,  the  Cleveland 
bank  at  Cincinnati  and  Pittsburgh,  the  Kansas  City  bank  at  Omaha 
and  Denver  and  the  San  Francisco  bank  at  Portland,  Spokane,  Seattle 
and  Salt  Lake  City.  The  United  States  is  divided  into  12  districts, 
each  with  its  Federal  Reserve  Bank,  thus  covering  the  entire  country. 
16 


242  THE  BUSINESS  MAN  AND  HIS  BANK 

place  banks  of  similar  capitalization  in  the  same  group. 
Each  bank  has  one  vote  for  two  directors,  one  of  whom, 
called  "Class  A  director,"  is  a  banker  and  represents 
the  banking  interests  of  the  group,  while  ''Class  B 
director"  is  a  business  man  and  represents  the  business 
element.  To  these  six  directors  are  added  three  known 
as  "Class  C  directors"  appointed  by  the  Federal  Reserve 
Board.  One  of  the  Class  C  directors  must  be  a  banker 
and  is  known  as  "Chairman  of  the  Board"  and  '^ Federal 
Reserve  Agent."  The  Board  therefore  consists  of  nine 
directors  holding  office  for  three  years,  the  term  of  one 
director  in  each  class  terminating  each  year. 

The  Federal  Reserve  Board  has,  as  an  advisory  council, 
a  board  of  twelve  men  appointed  by  the  boards  of  the 
various  Federal  Reserve  Banks,  This  advisory  board 
meets  with  the  Federal  Reserve  Board  at  least  four  times 
a  year.  This  interlocking  of  interests  and  intellects,  the 
appointment  from  above  of  directors  to  the  various 
boards,  and  the  appointment  by  them  of  a  representative 
from  below,  makes  for  a  common  interest  and  unity  of 
action  and  purpose. 

Consolidated    Reserves. 

Since  June  21,  1917,  the  entire  legal  reserves  of  member 
banks  have  been  kept  with  the  Federal  Reserve  Bank  of 
the  district.  Thus  the  old  practice  of  having  compulsory 
''reserve  agents"  for  country  banks  has  been  abandoned 
and  balances  with  the  reserve  banks  substituted.*  The 
cash  on  hand  no  longer  counts  as  reserve  and  is  optional 
with  the  bank.  This  has  brought  into  one  central  reser- 
voir the  legal  reserves  of  the  member  banks,  making  it  a 
powerful  fund  for  the  common  good.     Member  banks 

*  In  some  states,  state  banks  and  trust  companies  joining  the  system 
are  allowed  to  carry,  only  part  of  their  legal  reserves  in  the  Federal 
Reserve  bank  of  the  district;  but  National  banks  must  now  carry  all 
their  reserves  in  the  Federal  bank,  the  Cash  in  vault  being  optional. 


THE  FEDERAL  RESERVE  JiAXK  243 

may  still  maintain  accounts  with  their  correspondents, 
but  these  balances  cannot  count  in  the  reserve.  The 
amounts  now  required  as  reserve  in  the  various  banks 
follow : 

Percentage  of  Percentage  of 

demand  deposits  time  deposits* 

C/oiintry  Banks 7  3 

Reserve  City  Banks 10  3 

Central  Reserve  Banks 13  3 

Reserve  Cities  are:  Albany,  Baltimore,  Boston,  Cin- 
cinnati, Chicago,  Cleveland,  Detroit,  Louisville,  Milwau- 
kee, New  Orleans,  New  York,  Philadelphia,  Pittsburgh, 
St.  Louis,  San  Francisco,  Washington.  Central  Reserve 
Cities:  New  York,  Chicago,  and  St.  Louis. 

The  Federal  Reserve  Banks  must  maintain  a  reserve 
of  35  per  cent,  of  their  deposits  in  gold,  the  balance  being 
invest]  ble  funds.  The  policy  of  all  the  Federal  banks 
has  been  to  maintain  much  larger  than  the  legal  reserves. 

These  reservoirs  of  money  to  be  effective  must  not 
only  exist  but  they  must  be  mobile — ^that  is  quickly 
available  at  various  points,  just  as  the  water  in  a  reser- 
voir to  be  of  any  benefit  must  be  connected  by  pipes  to 
the  various  buildings  and  hydrants.  The  Federal 
Reserve  System  admirably  performs  this  function. 
Money  may  quickly  be  moved  from  one  district  to 
another  as  needed,  both  physically  and  by  means  of 
credit. 

If  for  instance,  the  Federal  Reserve  Bank  of  Kansas 
City  is  in  need  of  funds,  it  may  rediscount  some  of  its 
paper  in  Chicago.  If  Chicago  is  loaned  up,  it  may 
rediscount  in  New  York,  and  so  on,  the  money  coming 
from  the  place  where  it  is  in  abundance  to  the  place 
where  it  is  scarce. 

*  A  time  deposit  is  one  which  by  the  rules  of  the  bank  nmst  or  may 
have  notice  of  withdrawal,  not  less  than  30  days,  and  postal  savings 
deposits. 


244  THE  BUSINESS  MAN  AND  HIS  BANK 

If  again,  the  Government,  in  a  large  operation  like 
that  of  building  the  Hog  Island  Ship  Yard,  must  make 
heavy  payments  through  Philadelphia,  it  will  deposit 
with  the  Philadelphia  Reserve  Bank,  or  draw  on  it 
against  deposits  already  made  from  the  sale  of  Liberty 
Bonds  or  Treasury  Certificates.  If  Philadelphia  should 
be  unable  to  respond  to  the  call,  funds  would  be  trans- 
ferred from  other  banks  not  needing  the  money. 

Federal  Reserve  Rediscount  System  and  Federal 
Reserve  Notes. 

Perhaps  no  feature  of  the  operation  of  the  Federal 
Reserve  Bank  is  more  interesting  and  affects  the  business 
interests  of  the  country  more  vitally  than  the  rediscount 
function,  for  out  of  it  grows  the  circulating  medium 
of  the  country,  Federal  Reserve  Notes.  Through  this 
device  the  member  banks  are  protected,  knowing  that 
at  any  tiime  they  can  turn  their  assets  into  cash.  It  is 
a  source  of  immeasurable  safety  and  relief  to  the  banker 
to  know  that  as  long  as  he  makes  sound  loans,  and 
conforms  to  the  Federal  Reserve  requirements  as  to 
their  character,  he  can  turn  these  loans  into  money  to 
meet  any  demand  on  the  part  of  his  people. 

Let  us  illustrate  this  principle  by  an  illustration  that 
is  true  to  life.  The  Federal  Reserve  Act  permits  the 
Federal  Reserve  Banks  to  issue  Federal  Reserve  Notes 
as  long  as  they  hold  a  reserve  of  40  per  cent,  in  gold 
against  them,  together  with  100  per  cent,  of  accepted 
commercial  paper.  Let  us  suppose  that  bank  A  finds 
itself  in  need  of  $100,000.  It  may  be  short  in  its  reserve, 
on  account  of  heavy  withdrawals,  or  it  may  have  made 
loans  in  anticipation  of  certain  deposits  remaining  in 
the  bank  that  have  been  suddenly  checked  out.  All 
it  needs  to  do  is  to  take  certain  promissory  notes  from 
its  files  to  the  Federal  Reserve  Bank  of  the  district  and 


THE  FEDERAL  RESERVE  BANK  245 

it  will  immediately  receive  credit  for  the  proceeds  at  the 
current  rate  of  interest.  Or,  it  may  receive  the  amount 
in  cash,  if  it  needs  cash.  And  as  long  as  the  Federal 
Reserve  Bank  holds  $40  in  gold  to  $100  in  accepted 
paper  it  may  continue  this  process. 

The  result  of  this  privilege  to  the  business  man  is 
this:  As  long  as  he  accepts  sound  paper  he  may  rest 
assured  of  being  able  to  continue  to  receive  discounts, 
for  the  bank  can  pass  the  loan  on  to  the  Federal  Reserve 
Bank.  The  bank  is  safe  in  extending  credit  knowing 
that  it  can  itself  rediscount.  This  logically  makes  for 
protection  to  both  business  and  banking  interests. 

The  trade  acceptances  discussed  in  Chapter  22  are 
a  favored  form  of  paper  in  the  Federal  Reserve  Banks, 
and  are  freely  accepted  for  discount.  One  of  the  chief 
reasons  why  merchants  should  favor  this  form  of  set- 
tlement is  the  fact  that  they  are  eligible  for  discount  in 
the  Federal  Reserve  Bank  and  as  a  rule  carry  preferential 
rates.  Bank  acceptances  are  of  course  in  the  same  class 
and  highly  favored  because  of  the  quality  of  their 
acceptance. 

At  times  the  Federal  Reserve  Banks  go  into  the  market 
and  buy  both  bank  and  trade  acceptances,  thus  placing 
money  at  the  disposal  of  business  and  at  the  same  time 
distributing  funds  from  places  where  they  are  abundant 
to  those  where  scarcity  exists.  By  this  method  the 
discount  rates  are  equalized  and  the  volume  of  money 
regulated. 

Paper  to  be  eligible  for  rediscount  must  conform  to 
the  following  general  requirements.  (1)  It  must  be  of 
short  duration,  not  over  90  days  at  the  time  of  redis- 
count, except  that  a  limited  amount  of  bills  drawn  for 
agricultural  purposes  or  based  on  live  stock  may  have 
six  months'  maturity.  (2)  Paper  endorsed  by  a  member 
bank   arising   out   of   actual    commercial   transactions. 


246  THE  BUSINESS  MAN  AND  HIS  BANK 

(3)  Paper  bearing  the  indorsement  of  a  member  bank 
issued  for  the  purpose  of  trading  in  or  carrying  United 
States  obHgations. 

(4)  Paper  based  upon  goods  in  storage  or  in  transit 
represented  by  the  proper  documents.  (These  would 
be  bills  of  lading  or  warehouse  receipts.) 

In  short,  any  promissory  note,  or  acceptance  that 
represents  a  commercial  transaction,  whether  large  or 
small,  may  be  rediscounted  at  the  Federal  reserve  banks. 
But  obligations  representing  mere  loans,  or  issued  for 
the  purpose  of  trading  in  stock  or  bonds  (Wall  Street 
transactions)  or  for  fixed  investments,  such  as  land, 
machinery,  etc.,  are  not  eligible  for  rediscount.  The 
purpose  of  the  loan  is  usually  certified  to  by  the  discount- 
ing bank,  and  the  paper  need  not  bear  more  than  one  name 
if  it  conforms  otherwise  to  the  requirements. 

The  security  back  of  Federal  Reserve  Notes  consists 
of:  (1)  Paper  endorsed  by  member  banks  and  issued  for 
strictly  commercial  or  agricultural  purposes  or  for  the 
purpose  of  carrying  or  trading  Government  obligations. 
Any  paper  eligible  for  rediscount  may  be  used  for  note 
issue  purposes.  (2)  Bills  of  exchange  endorsed  by  a 
member  bank  and  bankers'  acceptances  bought  in  the 
market  (3)  Gold  and  gold  certificates. 

In  order  to  reduce  the  amount  of  notes  when  surplus 
money  is  in  circulation,  which  is  as  important  as  to  increase 
the  amount  when  needed,  the  machinery  works  smoothly. 
Money  sooner  or  later  finds  its  way  into  banks,  and 
these  banks  naturally  send  their  surplus  funds  to 
the  Federal  Reserve  Bank  for  reserve  purposes.  The 
Federal  Reserve  Bank  will  withdraw  such  notes  as 
are  not  needed  as  comes  to  its  hand,  from  circulation, 
sending  the  notes  of  other  Federal  Reserve  Banks  to 
the  banks  issuing  them,  the  law  requiring  these  banks 
to  send  to  the  place  of  issue  all  such  notes  received.     In 


THE  FEDERAL  RESERVE  BANK  247 

other  words,  one  Federal  Reserve  Bank  may  not  pay 
out  the  notes  of  another  but  must  send  them  home  for 
redemption. 

Federal  Reserve  Bank  Notes. 

The  Federal  Reserve  Banks  are  authorized  to  issue 
"Federal  Reserve  Bank  Notes,  which  are  precisely  the 
same  as  national  bank  notes  and  are  secured  by  United 
States  Bonds.  As  has  heretofore  been  said,  national 
banks  are  permitted  (and  before  the  Federal  Reserve 
Act  was  passed  were  compelled)  to  buy  a  certain  amount 
of  United  States  Bonds.  These  were  lodged  with  the 
Treasury  of  the  United  States  and  in  return  the  banks 
received  national  bank  notes  for  the  full  face  value  of  the 
bonds.  A  national  bank  note  is  therefore  nothing  but 
a  Government  bond  reduced  to  small  denominations 
without  interest.  It  is  the  intention  of  the  Federal 
Reserve  Act  to  eventually  retire  the  national  bank  notes 
and  issue  in  their  stead  Federal  Reserve  Bank  notes 
under  the  same  general  procedure.  The  process  of 
retiring  the  national  bank  notes  and  substituting  the 
Federal  Reserve  Bank  notes  is  technical  only  and  is 
not  pertinent  to  the  present  work. 

The  profits  of  the  Federal  Reserve  Banks  are  appor- 
tioned as  follows:  To  the  member  banks,  6  per  cent, 
on  their  invested  capital.  The  balance  is  placed  in 
the  surplus  fund  of  the  Federal  Reserve  Banks  until  it 
equals  the  capital  stock  of  the  banks.  After  the  sur- 
plus equals  the  capital,  10  per  cent,  of  the  net  earnings 
above  the  6  per  cent,  dividends  is  to  be  added  to  sur- 
plus; the  balance  goes  to  the  Government  as  a  franchise 
tax.  The  net  earnings  of  the  Federal  Reserve  Banks 
for  1920  are  estimated  at  over  $100,000,000,  making 
them  extraordinarily  profitable.  This  is  due  to  the  fact 
that  they  pay  no  interest  to  any  one  on  deposits. 


248  THE  BUSINESS  MAN  AND  HIS  BANK 

Collecting  Checks  through  the  Federal  Reserve  Bank. 

In  the  chapter  on  checks  we  saw  how  banks  collect 
theu"  out  of  town  and  clearing  house  items.  Briefly 
summarized  the  process  consists  in  sending  local  checks 
to  the  clearing  house  and  out  of  town  checks  to  the 
bank's  correspondents.  These  collection  facilities  were 
part  of  the  service  rendered  the  country  banks  in  return 
for  the  deposit  maintained  at  a  low  rate  of  interest. 
However  well  developed  the  collection  arrangements 
might  have  been  under  the  old  regime,  they  failed  to 
put  the  bank  check  at  par  the  country  over,  and  the 
question  of  exchange  was  still  an  unsettled  one.  The 
country  banker  charged  it  and  the  city  bank  paid  it, 
and  passed  the  charge  on  to  the  last  holder  of  the  check. 

When  the  Federal  Reserve  Board  made  it  compulsory 
for  the  banks  to  carry  all  their  legal  reserve  in  the  Federal 
Reserve  Banks,  it  made  the  balance  in  the  depositary 
banks  of  no  account  as  reserve  and  a  courtesy  only  on 
the  part  of  the  country  banks.  As  part  of  the  program 
of  placing  the  bank  check  on  a  par  basis,  and  to  help 
the  country  banks  reduce  their  checks  to  legal  reserves 
in  the  shortest  time  possible,  the  Federal  Reserve  Banks 
inaugurated  extensive  collection  facilities. 

The  problem  of  installing  a  system  that  could  handle 
the  vast  number  of  checks  that  would  naturally  be 
poured  into  the  Federal  Reserve  Banks,  once  the  collec- 
tion of  checks  was  undertaken,  was  a  serious  one  and  the 
development  has  been  gradual.  The  various  Federal 
Reserve  Banks  now  operate  on  a  uniform  plan.  Each 
bank  exercises  the  function  of  a  clearing  agent  for  the 
banks  of  its  district,  and  for  non -member  banks  that 
wish  to  avail  themselves  of  the  privilege.  The  Federal 
Reserve  Bank  holds  itself  out  as  willing  to  receive  at  par 
checks  drawn  on  all  member,  clearing  member  and  other 
non-member  banks  that  agree  to  remit  at  par  through 


THE  FEDERiVL  RESERVE  BANK  249 

the  Federal  Reserve  Bank  of  the  district.  Checks  are 
also  received  for  collection  on  banks  outside  the  dis- 
trict that  agree  to  remit  at  par.  All  banks  clearing 
through  the  Federal  Reserve  Banks  must  pay  checks 
drawn  on  them  at  par  when  presented  at  their  counters. 
Checks  may  now  be  collected  at  par  in  over  21,000 
banks  in  the  Unites  States. 

Under  the  old  regime,  a  check  was  considered  reserve 
as  soon  as  it  was  put  in  the  mails.  Under  the  new, 
checks  become  reserve  only  when  actually  collected. 
Therefore  rules  have  been  laid  down  as  to  the  length 
of  time  necessary  to  collect  checks  on  various  points, 
running  from  one  to  eight  days.  Thus  a  check  deposited 
in  the  New  York  Federal  Reserve  Bank  and  drawn  on  a 
New  York  bank  is  immediately  credited.  If  it  is  on 
Chicago,  three  days;  Texas,  eight  days,  etc. 

Banks  are  permitted  to  ship  currency  to  ihe  Federal 
Reserve  Banks  at  the  expense  of  the  latter  and  the  cost 
of  collecting  checks  is  borne  by  them  also.  The  banks 
are,  however,  allowed  to  charge  exchange  to  their  deposi- 
tors not  to  exceed  one-tenth  of  one  per  cent.  Time 
items,  such  as  drafts,  coupons,  and  bills  of  exchange 
may  also  be  collected  through  the  Federal  Reserve 
Banks,  with  no  charge  except  that  made  by  the  paying 
bank.  On  unpaid  items  there  is  a  charge  of  15  cents 
to  prevent  the  misuse  of  the  collecting  machinery  for 
dunning  drafts  as  described  under  the  head  of  Collections. 

By  virtue  of  the  fact  that  the  various  Federal  Reserve 
Banks  have  direct  wire  connections  with  each  other, 
checks  may  be  paid  by  wire  with  the  utmost  dispatch. 
Thus  a  check  deposited  in  New  York  and  drawn  on  San 
Francisco  would  ordinarily  take  from  ten  to  twelve  days 
to  collect.  But  as  soon  as  the  check  arrives  in  San 
Francisco  and  is  paid,  the  San  Francisco  Federal  Reserve 
Bank  will  wire  the  New  York  bank  that  the  check  is 


250  THE  BUSINESS  MAN  AND  HIS  BANK 

paid  and  charge  its  account,  a  saving  of  nearly  a  week,  a 
very  decided  advantage.  These  telegraphic  advices  are 
without  cost  to  the  depositing  bank.  Otherwise  their 
collecting  machinery  is  no  different  than  that  of  other 
banks. 

It  is  of  utmost  importance  to  the  business  man  that 
the  checks  he  receives  in  the  course  of  business  shall  be 
paid  in  the  shortest  possible  time,  thus  giving  him  the 
use  of  the  funds  represented  thereby.  It  is  not  custom- 
ary for  banks  to  pay  against  uncollected  funds  (checks 
that  have  not  been  paid)  and  the  quicker  a  check  can  be 
presented  to  the  paying  bank  the  quicker  the  funds  be- 
come available.  Under  the  old  system  a  check  would 
often  go  by  a  roundabout  route  to  the  place  of  payment, 
and  if  not  paid,  come  back  the  same  way,  and  it  would 
be  several  days  and  often  a  week  or  more  before  the  fate 
of  the  check  was  known.  Under  the  Federal  reserve 
system,  checks  are  sent  by  the  most  direct  route  possible, 
and  are  considered  paid  as  soon  as  they  reach  their  des- 
tination, rather  than  wait  for  the  remittance  of  the 
draft  that  eventually  pays  the  check  in  New  York  or 
Chicago  funds.  Therefore  the  business  man  knows  that 
if  his  checks  are  collected  through  the  Federal  reserve 
banks,  he  will  get  the  quickest  returns  possible,  by  using 
the  fast  mails  and  the  telegraph.  This  is  perhaps  one 
of  the  greatest  benefits  of  the  Federal  reserve  system  to 
the  business  interests,  and  is  closely  followed  by  the 
elimination  of  exchange  charges.  The  bank  check  now 
circulates  at  par  in  fully  three  quarters  of  the  banks  of 
this  country. 

Gold  Settlement  Fund. 

One  of  the  fundamental  principles  of  banking  is  that 
the  banks  shall  be  the  custodians  of  the  money  funds 
of  the  country,  giving  their  depositors  the  right  to  issue 


THE  FEDERAL  RESERVE  BANK  251 

orders  against  these  funds,  commonly  called  checks, 
which  transfer  the  ownership  of  the  funds  from  one  to 
another.  Out  of  this  principle  has  arisen  the  checking 
function  of  banking,  now  developed  to  a  high  degree  of 
usefulness. 

One  of  the  weaknesses  of  the  old  system  was  the  neces- 
sity of  frequent  shipments  of  currency  between  banks, 
with  the  attendant  risks  and  costs.  The  Federal 
Reserve  Banks,  being  large  holders  of  money,  were  no 
exception  to  the  rule,  and  soon  found  a  better  medium 
of  settlement  necessary.  Therefore  each  Federal  Re- 
serve Bank  was  required  to  deposit  at  least  a  million 
dollars  in  gold  or  gold  certificates  with  the  nearest 
Treasury  or  Sub-Treasury,  and  in  addition  an  amount 
equal  to  its  indebtedness  to  other  Federal  Reserve 
Banks.  (This  fund  now  amounts  to  over  $600,000,000.) 
Each  bank  is  required  to  maintain  a  balance  of  at  least  a 
million  dollars  in  the  fund.  This  contribution  is  counted 
as  part  of  its  legal  reserves.  The  Federal  Reserve 
Agents  also  have  large  sums  of  gold  deposited  with  them 
as  security  for  Federal  Reserve  notes,  they  being  the 
custodian  of  the  gold  so  held. 

By  reason  of  this  fund,  the  various  Federal  Reserve 
Banks  are  enabled  to  make  telegraphic  transfers  one  to 
the  other.  The  combined  funds  exceed  a  billion  dollars 
and  the  weekly  clearings  through  these  funds  often 
exceed  a  billion  a  week.  It  is  through  this  fund  that 
settlements  for  checks  sent  out  by  the  various  Federal 
Reserve  Banks  are  made,  by  a  transfer  of  the  ownership 
of  this  fund.  If,  for  instance,  the  Federal  Reserve  Bank 
of  Chicago  owes  the  Federal  Reserve  Bank  of  Atlanta 
a  million  dollars,  all  it  has  to  do  is  to  transfer  by  tele- 
graph a  million  from  its  part  of  the  gold  fund  to  the 
credit  of  the  Atlanta  bank,  just  as  one  merchant  will 


252  THE  BUSINESS  MAN  AND  HIS  BANK 

draw  a  check  on  his  bank  balance  to  settle  his  debt  with 
another. 

The  Federal  Reserve  Banks  have  established  close 
connections  with  the  great  banks  in  foreign  countries 
for  the  purpose  of  furthering  our  foreign  trade,  and  the 
large  banks  are  now  opening  branches  throughout  the 
world,  a  privilege  conferred  upon  them  by  the  Federal 
Reserve  Act. 


CHAPTER  XXVI 
FOREIGN   EXCHANGE 

The  basis  of  the  world's  trade  is  not  money,  but  goods. 
In  the  intercourse  of  nations  as  well  as  the  dealings  of 
individuals,  the  one  desire  is  to  obtain  the  things  the 
others  possess,  for  these  alone  can  satisfy  the  wants  of 
men.  Money  is  merely  the  measure  of  the  worth  of  the 
things — the  yardstick  by  which  the  relative  values  are 
judged. 

At  the  close  of  the  World  War,  Europe  was  in  a  state 
of  poverty.  The  people  were  hungry.  They  were  ill 
clothed  and  poorly  housed.  To  have  sent  a  cargo  of 
gold  from  the  United  States  to  any  of  the  hungry  nations 
would  have  been  mockery,  for  they  could  not  eat  it, 
it  would  not  warm  them,  and  it  would  not  turn  the  wheels 
of  their  factories.  Only  as  the  gold  could  be  exchanged 
for  goods  did  it  have  value  to  them;  and  to  have  sent 
over  a  cargo  of  coal,  or  wheat  or  meat  would  have  ap- 
plied economic  principles  to  actual  conditions. 

The  nation  that  is  rich  in  land  and  therefore  produces 
grain  or  dairy  products  needs  the  manufactured  articles 
she  cannot  produce.  The  nation  that  has  water  power, 
ores,  raw  materials  of  various  kinds,  may  need  the  butter 
and  cheese  of  the  dairy  country,  and  must  exchange  the 
articles  she  produces  for  the  things  she  lacks.  In  fact 
it  is  necessar}^  to  thus  exchange  goods  if  the  well  being  of 
the  world  is  to  be  maintained,  for  it  is  said  in  the  Good 
Book  that  ''man  shall  not  live  by  bread  alone." 

The  most  useless  thing  in  the  world  is  money,  unless 
it  can  be  exchanged  for  goods;  and  unless  the  goods  are 
available  for  the  exchange,  of  what  use  is  the  money? 

253 


254  THE  BUSINESS  MAN  AND  HIS  BANK 

We  therefore  have  built  up  through  the  centuries  a 
world-wide  trade  in  goods,  each  country  producing 
that  for  which  it  is  best  adapted  and  exchanging  the 
goods  it  has  and  cannot  use  for  those  it  needs  and  cannot 
produce.  The  farmer  in  Iowa  who  produces  corn  wants 
to  exchange  his  corn,  turned  it  may  be  into  pork,  with  a 
manufacturer  of  linen  in  Belfast.  Since  the  Belfast  manu- 
facturer wants  pork,  they  trade  together.  The  process 
may  be  intricate  and  round-a-bout,  but  it  exists  just 
as  truly  as  if  the  farmer  were  to  take  a  bushel  of  corn 
to  the  village  store  and  exchange  it  for  a  yard  of  table 
linen.  If  the  merchants  of  one  country  bought  of  the 
merchants  in  another  country  exactly  the  same  amount 
of  goods  valued  at  the  same  amount  in  pure  gold,  there 
would  simply  be  an  offsetting  of  debts.  One  transac- 
tion would  cancel  the  other.  But  such  a  state  does  not 
exist.  A  nation  may  be  creditor  to  one  nation  and 
debtor  to  another.  It  may  buy  in  one  market  and  sell  in 
another.  For  instance,  at  the  present  time,  France  and 
England  owe  the  United  States  for  food  and  war  material, 
while  the  United  States  owes  Brazil  and  the  Argentine 
for  coffee  and  hides.  England  could  pay  the  Argentine 
for  our  account,  or  England  could  pay  us  and  we  pay  the 
Argentine.  The  result  would  be  the  same,  whatever  the 
process. 

The  principles  of  the  clearing  house  apply  here,  and 
instead  of  settling  debts  by  each  paying  the  other 
what  is  owing,  only  the  balance  is  settled;  and  all  that 
has  been  said  about  the  efficiency  of  the  clearing  house 
for  bank  settlements,  applies  to  foreign  exchange  for  in- 
ter-country settlements. 

If  a  silk  merchant  in  France  sells  a  consignment  of 
silk  to  a  New  York  dealer,  the  latter  could  ship  him 
gold  bars  for  the  amount.  If  an  iron  manufacturer 
in  New  York  sells  a  cargo  of  iron  in  France,  the  French- 
man could  pay  for  it  by  sending  gold  bars  to  America. 


FOREIGN  EXCHANGE  255 

But  why  this  double  shipment  of  gold  across  the  Atlantic 
with  the  cost  of  shipping,  the  risk  of  loss,  insurance  and 
freight?  Why  not  let  the  silk  merchant  get  his  pay  from 
the  iron  merchant  in  France,  and  the  iron  merchant  in 
the  United  States  get  his  pay  from  the  silk  importer 
here,  thus  eliminating  the  cost  of  the  double  shipment? 

When  the  silk  merchant  ships  his  goods  he  draws  a 
draft  on  the  buyer.  This  draft  is  sold  to  a  banker,  who 
sends  it  to  New  York,  and  the  New  York  bank  collects 
from  the  importer  and  pays  the  iron  merchant,  thus 
''clearing"  the  transaction  without  the  shipment  of 
money. 

While  the  illustration  is  simple,  its  working  details  are 
complex  and  out  of  such  dealings  arise  foreign  exchange 
transactions. 

The  subject  of  foreign  exchange  can  be  made  as  in- 
tricate as  mathematics  or  as  simple  as  a  trade  in  goods. 
To  the  banker  it  is  a  matter  surrounded  by  a  thousand 
different  influences.  The  volume  of  trade,  one  country 
with  another,  the  internal  conditions  of  nations,  interest 
rates,  the  supply  and  demand  for  goods,  wars  and  rumors 
of  wars,  speculation,  politics,  and  all  the  various  inter- 
ests that  go  to  make  up  human  life  have  their  direct 
and  indirect  influence  upon  exchange  rates.  The  ad- 
justment of  relative  values  depends  upon  all  these 
factors,  so  that  the  foregin  exchange  banker  must  be  of 
wide  vision,  shrewd  insight,  and  have  a  world  wide 
knowledge  of  men  and  events.  I  would  place  him  at 
the  top  of  his  profession.  On  the  other  hand,  the  mer-' 
chant  in  New  York,  buying  olive  oil  in  Italy  may  simply 
know  that  if  he  pays  the  banker  so  many  dollars  he  will 
get  so  many  gallons  of  oil,  little  caring  what  intricate 
influences  have  been  at  work  to  establish  the  basis  of  the 
transaction. 

The  merchant  in  New  York  wants  to  know  how  many 


256  THE  BUSINESS  MAN  AND  HIS  BANK 

dollars  he  must  pay  for  a  cargo  of  olive  oil  in  Italy, 
and  the  oil  merchant  in  Italy  wants  to  know  how  many 
lire  he  wiU  receive  for  his  oil,  else  he  cannot  long  continue 
in  business.  And  if  the  importer  must  sell  his  oil  for 
dollars,  he  must  know  how  many  dollars  the  oil  repre- 
sents to  him  else  he  too  will  be  working  in  the  dark. 
They  therefore  adjust  their  differences  when  the  trans- 
action is  made,  the  Italian  merchant  knowing  just  how 
many  lire  he  will  receive  and  the  New  York  merchant 
just  how  many  dollars  he  will  have  to  pay.  They  trade 
in  goods,  but  measure  in  gold. 

The  trade,  one  nation  wdth  another  is  termed  ''foreign 
trade"  and  the  financial  operations  that  arise  out  of  it 
are  termed  ''foreign  exchange."  The  latter  simply 
means  the  adjustment  of  prices  for  goods  by  adjusting 
the  money  of  one  country  to  that  of  another.  If  every 
nation  used  the  same  standard  of  value,  there  would  be 
no  foreign  exchange.  A  dollar  would  be  a  dollar  the 
world  over,  since  it  would  represent  a  definite  amount 
of  pure  gold,  which  is  the  basis  of  all  inter-country 
dealings.  But  inasmuch  as  different  countries  use  dif- 
ferent monetary  systems,  it  is  necessary  that  these 
values  be  adjusted  through  the  medium  of  banks  and 
bankers. 

How  Foreign  Exchange  Arises. 

The  basis  of  foreign  exchange  being  debts,  let  us  see 
how  these  debts  arise.  First  is  the  buying  and  selling 
of  merchandise,  raw  materials  and  manufactured  goods. 
Second,  insurance  and  freights  paid  by  one  country  to 
the  ship  ow^ners  and  insurance  companies  in  another. 
Thus  England  is  the  great  carrier  nation  of  the  world. 
Her  ships  sail  every  sea.  Her  great  insurance  com- 
panies insure  cargoes  the  world  over.  The  premiums 
must   be   paid   to   the   home   office  in  London,  and  so 


FOREIGN  EXCHANGE  257 

money  must  be  sent  to  London  for  these  freights  and 
insurance  premiums. 

Third,  securities  held  abroad.  Thus  at  the  present 
time,  the  United  States  holds  bonds  of  England,  France, 
Italy,  Russia,  representing  loans  to  these  countries.  The 
interest  on  these  loans  must  be  paid  on  this  side  the 
Atlantic  and  when  the  bonds  are  due  they  must  be  paid 
in  this  country.  Japan  has  a  loan  outstanding  that 
is  payable  in  London  in  1925  in  sterling.  Japan  will 
therefore  be  obliged  to  have  funds  in  London  to  meet 
these  bonds  when  due  and  interest  from  time  to  time 
as  it  falls  due.  Fourth,  travelers  expenses.  Europe, 
being  the  great  play-ground  for  Americans,  receives 
annually  vast  sums  from  the  United  States  from  this 
source.  As  a  rule  these  travelers  do  not  carry  much 
money,  but  letters  of  credit,  which  entitle  them  to  re- 
ceive money  abroad  as  needed.  This  money  must  of 
course  be  provided  for. 

Fifth,  money  loaned  by  banks  in  one  country  for 
investment  in  the  markets  of  other  countries.  Thus, 
if  the  interest  rate  in  England  is  6  per  cent,  while  the 
rate  here  is  5  per  cent.,  the  bankers  here  will  send  money 
to  London  for  lending  in  the  English  market. 

Sixth,  the  war.  This  is  a  new  element  in  foreign  ex- 
change matters  and  has  changed  the  whole  course  of 
foreign  exchange.  Before  the  war  we  were  a  debtor 
nation.  The  balances  were  always  against  us.  We 
owed  Europe  more  than  Europe  owed  us.  We  borrowed 
heavily  in  European  markets.  We  used  English  ships 
and  English  insurance  companies  and  our  travelers 
spent  their  money  freely. 

The  war  has  changed  all  this  and  we  are  now  the 
creditor  nation.  The  European  nations  bought  heavily 
of  our  war  supplies  to  carry  on  the  war.  We  furnished 
food  for  millions  of  fighting  men  and   stay-at-homes. 

17 


258  THE  BUSINESS  MAN  AND  HIS  BANK 

We  bought  back  our  securities  held  abroad.  We  loaned 
vast  sums  to  the  fighting  nations.  We  sold  them  goods 
and  took  their  bonds  in  payment.  We  sold  more  than 
we  bought  and  the  balance  of  trade  was  for  the  first  time 
in  our  favor. 

Lastly,  the  remittances  to  those  Americans  (?)  who 
have  moved  abroad,  or  have  married  into  titled  families 
and  draw  their  income  from  estates  and  investments  on 
this  side.  They  earned  or  inherited  their  money  here 
and  spend  it  abroad  and  it  must  needs  be  sent  to  them. 
This  is  not  a  controlling  element  but  an  important  one 
nevertheless.  While  European  travel  was  suspended 
by  the  war,  travelers  expenditures  were  not  a  leading 
factor.  The  sightseer  who  contemplates  a  trip  to  Europe 
arranges  with  his  banker  for  a  letter  of  credit,  good  any- 
where. As  he  needs  funds  he  presents  the  letter  to  the 
foreign  banker  and  has  the  funds  advanced  to  him,  and 
indorsed  on  the  letter.  The  foreign  banker  charges  the 
amount  to  the  bank  issuing  the  draft  and  in  due  time 
draws  a  draft  on  the  American  bank  in  settlement. 

Instruments  of  Foreign  Exchange. 

The  chief  instrument  of  foreign  exchange  is  the  bill 
of  exchange,  which  is  ''an  order  in  writing  signed  by  the 
maker,  directing  a  third  party  to  pay  to  a  designated 
second  party  or  to  bearer,  a  sum  certain  in  money,  on 
demand  or  at  a  fixed  or  determinable  future  time." 
These  bills  come  into  existence  through  several  causes 
and  the  supply  depends  upon  the  intensity  of  the  cause. 
The  supply  of  bills  in  this  country  arises  from: 

(a)  Merchandise  sold  abroad,  the  seller  drawing  on 
the  buyer,  or  on  a  bank  designated  by  him. 

(6)  Securities  sold  abroad.  The  seller  draws  on  the 
buyer,  or  broker  in  the  transaction. 

(c)  Foreign  loans  placed  in  this  market,   the  repre- 


FOREIGN  EXCHANGE  259 

sentative  here  drawing  upon  the  lender  abroad  for  the 
amount  to  be  loaned. 

(d)  Finance  bills,  which  are  bills  drawn  by  a  banker 
here  on  a  banker  abroad,  the  banker  on  this  side  selling 
them  and  using  the  proceeds  until  they  become  due. 

The  demand  for  bills  in  this  country  arises  from: 

(a)  The  buying  of  merchandise  abroad  (imports), 
payment  being  made  by  purchase  of  bills  payable  abroad 
to  be  sent  to  the  seller  in  settlement.  Thus  if  an  im- 
porter buys  a  consignment  of  goods,  he  may  have  the 
seller  draw  on  him  or  his  bank;  but  if  he  can  purchase 
a  bill  payable  in  the  same  country  and  send  to  his  credi- 
tor to  collect,  it  will  accomplish  the  same  purpose. 

(6)  The  need  for  bills  with  which  to  pay  for  securities 
purchased  abroad. 

(c)  The  payment  of  interest  and  dividends  on  foreign 
capital  invested  here. 

(d)  The  remittances  of  foreigners  residing  here  to 
be  sent  home. 

(e)  The  payment  of  freight  and  insurance  earned  here, 
belonging  to  foreign  companies. 

(/)  Tourists  expenses  and  remittances  to  Americans 
living  abroad. 

(g)  Bills  for  the  payment  of  maturing  loans. 

The  medium  through  which  foreign  exchange  trans- 
actions are  carried  on  is  the  bill  of  exchange,  or  draft, 
as  already  stated.  When  a  bill  of  goods  is  sold  to  a 
buyer  in  another  country  and  the  goods  are  ready  to 
move,  a  draft  for  the  amount  is  drawn  on  the  buj^er. 
This  draft  is  sold  to  a  banker  at  the  place  of  shipment 
and  the  seller  has  immediate  payment  for  his  goods.  If 
an  English  insurance  company  has  due  it  from  its  agency 
in  this  country,  premiums  for  insurance  written  and  col- 
lected it  would  draw  a  draft  on  its  New  York  agent  for 
the  amount  and  this  could  be  sold  in  London.     If  a 


260 


THE  BUSINESS  MAN  AND  HIS  BANK 


FOREIGN  EXCHANGE  261 

London  bank  were  loaning  a  certain  amount  of  money, 
in  the  New  York  market,  it  would  authorize  its  New  York 
correspondent  to  draw  on  it.  We  therefore  have  drafts 
arising  from  these  transactions  constantly.  Perhaps 
the  procedure  will  be  more  clearly  seen  by  an  illustration, 
which  shows  the  use  of  the  letter  of  credit. 

A  linen  merchant  in  London  sells  a  quantity  of  linen 
to  a  New  York  importing  house.  The  importer  being 
in  good  credit  with  his  bank,  obtains  a  letter  of  credit 
from  a  New  York  bank,  which  letter  guarantees  to  pay 
against  the  shipment  of  linen  up  to  a  certain  amount, 
on  drafts  accompanied  by  bills  of  lading  and  insurance 
certificate.  The  importer  forwards  the  letter  to  the 
seller.  When  the  consignment  is  ready  to  go  forward, 
the  draft  is  drawn,  insurance  effected  and  bill  of  lading 
secured  from  the  carrier  and  attached  to  the  draft. 
Having  the  assurance  from  a  New  York  bank  that  the 
bill  will  be  paid  upon  presentation,  the  London  bank 
will  immediately  credit  the  seller  with  the  amount,  less 
interest  for  the  time  the  bill  has  to  run. 

These  letters  of  credit  are  the  basis  of  foreign  dealing 
as  they  are  the  warrant  that  the  bills  drawn  in  accord- 
ance with  the  terms  will  be  paid.  In  short,  it  is  the 
bank's  guaranty  of  payment. 

The  Basis  of  Exchange. 

Quotations  for  English  or  ''sterling"  exchange  fluctu- 
ate around  $4.8665,  which  is  the  equivalent  in  United 
States  money  of  the  English  unit,  the  pound  sterling. 
In  the  pound  (or  sovereign)  there  are  113.00157  grains 
of  pure  gold  and  in  our  dollar  there  are  23.22  grains. 
Dividing  the  former  by  the  latter,  we  have  4.8665  as  the 
quotient.  It  is  around  this  amount,  $4.8665,  as  a 
center  that  quotations  for  drafts  on  Great  Britain 
fluctuate. 


262  THE  BUSINESS  MAN  AND  HIS  BANK 

The  German  mark  contains  5.53113  grains  of  gold 
which  is  the  equivalent  of  23.8  cents  of  American  money. 
Quotations  for  exchange  on  Germany  have  usually 
been  given  in  terms  of  four  marks  which  are  worth  in 
American  money  95.2  cents.  Recently,  however,  quota- 
tions are  being  given  in  terms  of  one  mark. 

The  French  franc  contains  4.48025  grains  of  gold 
and  is  the  equivalent  of  19.3  cents  in  American  money. 
Quotations  for  French  exchange,  however,  are  not 
expressed  in  the  same  way  as  those  on  England  and 
Germany.  The  American  dollar  is  worth  5.18  francs 
and  quotations  for  French  exchange  fluctuate  about 
this  figure  as  a  center.  The  same  method  of  quotation 
is  used  for  Belgium,  Switzerland,  Italy,  and  Greece  as 
for  France. 

The  Monopoly  of  the  English  Banks. 

Heretofore,  in  financing  exports  or  imports,  the  Eng- 
lish banks  were  the  medium  through  which  the  credits 
were  arranged.  The  exporter  in  South  America  selling 
to  a  New  York  merchant  would  require  a  letter  of  credit 
issued  by  an  English  bank,  the  American  banks  not  being 
known  to  him.  When  the  goods  were  shipped  he  would 
draw  a  draft  on  the  English  bank  and  send  the  same  to 
England  for  acceptance,  while  the  goods  went  to  New 
York.  As  soon  as  the  di^aft  was  accepted,  the  shipping 
documents  were  sent  to  New  York  and  the  goods  were 
delivered.  When  the  acceptance  was  about  to  mature 
the  American  importer  was  obliged  to  go  into  the  ex- 
change market  and  buy  a  draft  on  London  to  cover  the 
amount  due,  which  he  sent  to  London. 

Since  American  banks  have  been  accepting  drafts, 
''dollar  exchange" — drafts  drawn  in  dollars  on  American 
banks,  have  been  used  in  financing  imports  and  exports. 
Some  of  the  great  New  York  banks  and  trust  companies 


FOREIGN  EXCHANGE  263 

have  established  branches  in  various  parts  of  the  world, 
and  new  corporations  have  been  formed  to  handle  this 
business.  The  practical  operation  of  an  import  and 
an  export  transaction  will  be  seen  from  the  following 
illustrations,  taken  from  a  pamphlet  issued  by  the 
National  City  Bank  of  New  York. 

Acceptances  Covering  Exports 
Bill  of  Exchange  for  $3,749.60. 

New    York,    January    25,    1917 
Ninety  days  after  sight  of  this  First  of  Exchange  (Second  unpaid) 

pay  to  the  order  of  International  Banking  Corporation, 

Three  Thousand  Seven  Hundred  Forty-nine  60/100  Dollars  United 
States  Currency  Value  received  and  charge  to  account  of  Letter  of 
Credit  I.  B.  C.  16/8721.     Two  automobiles  S/S  Kandahar  to  India. 
(Signed)     John  Jones   &   Co.,    Inc., 

John  Jones,  President. 

To  The  National  City  Bank  of  New  York, 

New  York  City. 

Across  the  face  of  the  draft  is  stamped 

Accepted 

January  25,  1917 

The  National  City  Bank  of  New  York 

New  York 

and  signed  by  one  of  the  Vice-Presidents  or  the  Cashier  of  the  Bank. 

The  draft  is  indorsed  on  the  back  by  the  International  Banking 
Corporation. 

In  this  case  some  one  in  India  wanted  to  purchase  two  automo- 
biles from  Jones,  who  was  unwilling  to  ship  them  without  first  receiving 
his  money.  The  Indian  went  to  his  local  bank,  in  this  case  prob- 
ably the  International  Banking  Corporation,  and  arranged  with  it  to 
open  a  credit  with  The  National  City  Bank  against  which  Jones 
could  draw  at  90  days'  sight.  This  being  arranged,  The  National 
City  Bank  advised  Jones  that  the  credit  had  been  established  and  he 
shipped  his  automobiles.  Since  the  draft  is  made  payable  to  the 
International  Banking  Corporation,  Jones  drew  his  draft  as  above 
and  to  it  attached  the  bill  of  lading  and  other  shipping  documents  and 


264  THE  BUSINESS  MAN  AND  HIS  BANK 

sent  them  all  to  the  International  Banking  Corporation.  The  I.  B.  C- 
in  turn  presented  all  documents  to  The  National  City  Bank  where, 
everj^hing  being  in  order,  the  draft  was  accepted  and  returned  to 
the  I.  B.  C,  the  documents  being  detached  and  forwarded  to  the 
Indian  bank  arranging  the  credit.  The  I.  B.  C.  discounted  the  draft 
for  Jones,  who  thereby  received  the  cash  for  his  automobiles.  The 
I.  B.  C.  sold  the  bill  to  The  National  City  Company,  thus  getting 
their  money  back,  and  The  National  City  Company  sold  it  to  an 
institution  looking  for  a  high  grade  short  term  investment. 

In  the  meantime,  the  automobiles  are  presumably  on  their  way  to 
India,  where  they  will  probably  arrive  before  the  90  days  have 
elapsed.  Shortly  before  the  90  days  are  up  the  Indian  merchant 
places  his  bank  in  funds  with  which  to  meet  the  bill  and  they  in  turn 
transfer  it  to  The  National  City  Bank.  At  maturity  the  holder  of 
the  draft  presents  it  to  The  National  City  Bank  and  receives  payment 
for  the  full  face  amount. 

It  will  be  noticed  that  The  National  City  Bank  was  not  using  any 
of  its  funds  during  this  whole  transaction;  in  fact,  it  received  a  com- 
mission for  extending  its  credit.  Jones  received  payment  for  his 
automobiles  as  soon  as  they  were  shipped.  The  International 
Banking  Corporation  got  its  money  back  when  it  sold  the  bill  to 
The  National  City  Company,  which  in  turn  was  reimbursed  when  the 
bill  was  sold  to  the  investor.  Also  the  Indian  will  probably  have  his 
automobiles  before  being  called  upon  to  pay  his  local  bank,  which  in 
turn  will  transfer  the  funds  received  from  him  to  The  National  City 
Bank. 

Acceptance  Covering  Imports 

Bahia,  the  5th  January,  1917,  For  $18,267.68. 

At  ninety  days'  sight  pay  this  First  of  Exchange  (second  and  third 
unpaid) 

to  the  order  of  The  British  Bank  of  South  America,  Limited,  Eighteen 
Thousand  two  hundred  and  sixty-seven  dollars  and  sixty-eight  cents. 
Value  of  same  Drawn  under  Letter  of  Credit  dated  28/11/16  against 
shipment  of  1,500  bags  cocoa  per  S.  S.  Raphael  to  New  York,  account 
of  H.  H.  Harris.  (Signed)     A.  B.  Smith 

To  The  National  City  Bank  of  New  York, 
New  York. 
The  bill  is  accepted  just  as  in  the  first  example. 
The  following  indorsements  are  on  the  back  of  the  draft: 


FOREIGN  EXCHANGE  265 

The  British  Bank  of  South  America,  Ltd. 
The  Bank  of  New  York,  N.  B.  A.  Attorney 
F.  A.  Klingsmith, 

Assistant  Cashier. 
Indorsement  guaranteed 

The  Bank  of  New  York,  N.  B.  A., 
F.  A.  Klingsmith, 

Assistant  Cashier. 

In  this  case,  Harris  arranged  with  The  National  City  Bank  to 
permit  Smith  to  draw  on  it.  The  credit  being  arranged,  the  Bank 
notified  Smith  of  that  fact,  either  by  letter  or  cable,  depending  upon 
the  urgency  of  the  matter.  Smith,  upon  shipping  his  cocoa,  sold  his 
draft  to  the  British  Bank  of  South  America,  Ltd.,  at  the  prevailing 
rate  for  dollar  exchange  in  Bahia.  The  British  Bank  forwarded  the 
draft  and  documents  to  its  New  York  correspondent,  the  Bank  of 
New  York,  with  instructions  to  discount  it  in  the  open  market  after 
it  was  accepted.  When  accepted,  the  documents  were  detached  by 
The  National  City  Bank  and  the  acceptances  returned  to  the  Bank  of 
New  York,  who  sold  it  to  the  City  Company.  Harris'  credit  standing 
being  of  the  highest,  the  shipping  documents  covering  the  cocoa  were 
probably  turned  over  to  him,  thus  giving  him  90  days  in  which  to  sell 
the  cocoa  and  place  himself  in  funds  with  which  to  pay  the  bill  at 
maturity.  If  his  credit  is  not  good  enough,  the  Bank  maj^  retain 
the  documents  until  the  maturity  of  the  draft  or  release  them  only 
upon  deposit  of  approved  collateral. 

Forms  of  Bills. 

There  are  several  forms  of  bills  offered  in  the  exchange 
market,  namely:  (1)  Commercial  bills.  These  are  bills 
drawn  by  merchants  for  shipments  of  goods,  and  due  in 
thirty,  sixty  or  ninety  days.  They  are  usually  accompa- 
nied by  documents,  such  as  bill  of  lading,  invoice, 
insurance,  inspection  certificate,  etc.,  and  are  called 
"documentary  bills." 

(2)  Bills  drawn  for  the  purpose  of  transferring  funds 
from  place  to  place,  usually  called  ''finance  bills." 

(3)  Bankers  drafts,  which  are  drafts  drawn  by  bankers 
in  one  country  on  their  correspondents  abroad,  and  are 


266  THE  BUSINESS  MAN  AND  HIS  BANK 

similar  to  bank  drafts  in  this  country  drawn  by  one 
bank  on  another,  usually  a  country  bank  on  a  city  bank. 
They  are  used  for  the  same  purposes  in  foreign  trans- 
actions as  cashiers  checks  or  ''drafts  on  New  York"  are 
used  in  domestic. 

Foreign  exchange  instruments  are  usually  drawn  in 
sets  of  two  or  three.     The  reason  is  the  perils  of  the  sea. 

They  usually  read  ''At days  sight,  pay  this  first 

of  exchange  (second  unpaid)"  etc.,  — meaning  that  two 
drafts  have  been  issued  in  duplicate  but  only  one  is  to  be 
paid.  One  copy  is  sent  by  one  steamer  and  the  other 
by  another,  so  that  in  case  of  shipwreck  the  evidence  of 
the  transaction  will  survive. 

The  Rise  and  Fall  of  Exchange  Rates. 

Inasmuch  as  the  rise  and  fall  of  exchange  rates  is 
regulated  by  the  suppl}^  of  and  demand  for  bills,  rates 
in  this  country  will  go  up  when: 

1.  Imports  are  large,  necessitating  the  purchase  of 
bills  with  which  to  make  payment. 

2.  The  purchase  of  securities  abroad,  or  the  repurchase 
of  our  own  securities  held  abroad.  This  also  requires 
bills  to  effect  payment. 

3.  American  bonds  falling  due,  and  held  in  Europe. 

4.  Low  money  rates  here,  and  consequently  a  demand 
for  bills  to  send  money  abroad  for  investment. 

5.  High  money  rates  in  some  money  centre,  leading  to 
a  desire  on  the  part  of  banking  interests  here  to  invest 
abroad. 

Reversely,  rates  A\dll  fall  through  causes  quite  the 
opposite,  which  are: 

1.  Heavy  exports  of  merchandise,  resulting  in  a  large 
supply  of  bills. 

This  condition  obtained  during  the  period  following  the 
v/ar. 

2.  Loans  made  in  Europe  for  the  account  of  concerns 


FOKKICN  EXCHANGE  267 

in   this  country;  or  the  purchase  by  foreigners  of  our 
securities.     Each  transaction  carrying  with  it  a  bill  of 

IRVING  NATIONAL  BANK 

WOOLWORTH  BUILDING,  NEW  YORK 


Rnocahle  Export  Credit  No.  Dated  New  York,   Januery   Ist.    1920 

Mr.    John  Doe.  Expiring  New  York  P8>iruary   15,1920 

Hew  York  City. 
Dear  Slr:- 

We  are  informed  by      Barclaya   Tank:,    Ltd.    London .   -   .    - 

that  you  will  draw  upon  us  at-----    ---""".""    -alKht    -...--- 

for  account  of     Richard  Koe ,    London-  -----  '^'/''''jp-:'^.   '   ------- 

to  the  extent  of  TEN  THOUSAHD   AKD  OO/lOO  DOLURS    f|l6.000iO)>).'/*- -    -    -   -  - 

covering       ahlpment   of  ctitlory 


Documents  (corriplVtcrtat/ unlesj/<5thcrwise  stated  and  of  a  character  which 

will  meet  with  our  approvaljl  raiist  comprise : 

Steamer    Bills  of  Lading  ifsued^tfi     order,  enddrsed   in  blank 

Invoice 

Insurance  policloa  coTerlng  marine  and  wsrrialc 

All  documents  are  to  be  surrendered  to  us  upon    payment 

Bills  of  Lading  issued  by  Forwarding  Agents  will  not  be  accepted  unless 
specifically  authorized  herein,  and  payment  will  be  effected  only  provided  shipment  13 
actually  on  board  or  loading  on  the  vessel  named  in  the  Bills  of  Lading.  Insurance 
must  cover  from  warehouse  at  point  of  departure  to  consignee's  warehouse  at  destination. 

Drafts  must  clearly  specify  the  number  of  this  Credit,  and  be  presented  at  this 
Bank  on  or  before     Pobmary   15,    1920 

This  letter  is  for  your  guidance  in  preparing  documents  and  conveys  no  en- 
gagement on  the  part  of  the  Bank  as  we  have  no  instructions  to  confirm  the  Credit. 
Any  amendment  of  the  terms  of  the  Credit  must  be  in  writing  over  an  authorized 
signature  of  this  Bank. 

Yours  very  truly, 
PBO-fOIUU 

No  partnent  will  br  nude  unlcas  ihr  Irrms  mdicated  hrrein  »re  ttrirlly 
obtcrved.  If  iropouiblc  to  comply  wrOi  Eunr,  plcue  romaiuiucate  with 
at  uid/or  the  cooxignee  bffore  m&kiog  ahipmrnt^  with  a  virw  to 
obtaining  modihcatioD   of    the    Credit    to  conform    to  the  leniu  of  cUe.  09    Bt    tt'lt 

Fig.  21. — Export  letter  of  credit. 

exchange,  these  transactions  bring  into  being  many  such 
bills  in  ordinary  times. 


268 


THE  BUSINESS  MAN  AND  HIS  BANK 


3.  Withdrawal  of  deposits  made  by  financial  interests 
in  this  country  with  banks  abroad. 

IRVING  NATIONAL  BANK 

•  WOOLWORTH  BUILDING,  NEW  YORK 


Irrevoiahle  Export  Credit  No. 

Mr.    John  Toe  , 

New  York  City. 

Deer  Sir: - 


Dated  New  York,-    January  lat,   1980 
Expiring  New  York^fetruary  15.   1920 


-sight 


At  the  request  of  Barclays  Banlc  Ita.    lonaon- 
we  hereby  authorize  you  to  draw  upon  us  at  ------- 

for  account  of   Richard  Eoe,    London-  -------- 

to  the  extent  of   TEH  THOTJSAITD  AHI  OO/lOO  DOJJAKS    ($10,000^00)- 
covering    shipment  of  cutlery 


Documents  (comple/te  s^i)(il^^ther\)(i<e  stated  and  of  a  character  which 

will  meet  with  our  approval) 

Ste'imer     Dills  of  Lading  issu^JTto    oi^^r,   endoi^ed   In     lank 

Invoice 

Insurance  polio  leg  covering  marine  and  warrlalc 

All  documents  are  to  be  surrendered  to  us  upon'   payment 

Bills  of  Lading  issued  by  Forwarding  Agents  will  not  be  accepted  unless 
specifically  authorized  herein,  and  payment  will  be  effected  only  provided  shipment  is 
actually  on  board  or  loading  on  the  vessel  named  in  the  Bills  of  Lading.  Insurance 
must  cover  from  warehouse  at  point  of  departure  to  consignee's  warehouse  at  destination. 

-  Drafts  must  clearly  specify  the  ournbcr  of  this  Credit,  and  be  presented  at  this 
Bank  on  or  before        Ti'etruary   15,1920  i 

Any  amendment  of  the  terms  of  the  Credit  must  be  in  writing  over  an 
authorized  signature  of  this  Bank. 

Yours  very  truly. 


PRO«*fORiiA 

yiJsijfant  Manager  Foreign  Defit. 


No  payment  will  he  made  unteu  the  Irnni  indicatMl  hetcu  Ire  •trklttf 
obwnr^.  If  impooiblr  to  rompty  with  nine,  pl.uc  communic;in  with 
IM  intl/or  thr  rortifn^re  b<fore  making  iKipmml,  wttb  .  view  to 
obuinirf^   incMjtficaiion   of  the  Credit  to  conform   to   the   termi   of  Mle. 


Fio.   22. — Export  letter  of  credit. 

4.  High    rates    here,    resulting  in   a   withdrawing  of 
funds  from  abroad. 


FOREIGN  EXCHANGE  269 

American  Banks  in  the  Foreign  Exchange  Market. 

The  war  has  given  the  banks  of  this  country  their 
great  opportunity  to  enter  the  world-wide  field  of  finance, 
and  to  compete  strongly  with  the  great  English  banks 
for  foreign  business.  Prior  to  the  enactment  of  the 
Federal  Reserve  Act,  national  banks  were  not  permitted 
to  accept  drafts  drawn  on  them  and  payable  at  a  future 
date.  They  were  not  in  position  to  extend  credit  in 
the  form  of  acceptances  executed  for  customers,  and 
were  obliged  to  arrange  foreign  credits  through  the  Eng- 
lish banks.  The  latter  charged  a  fee  for  this  service  and 
the  American  bank  also  asked  its  commission,  thus 
placing  a  double  tax  upon  such  transactions. 

The  Federal  Reserve  Act  changed  ail  this  and  banks 
are  now  permitted  to  accept  drafts  having  not  more  than 
six  months  to  run: 

1.  That  grow  out  of  the  exportation  or  importation 
of  goods. 

2.  That  grow  out  of  a  domestic  shipment  of  goods 
providing  shipping  documents  conveying  or  securing 
title  to  the  goods  are  attached  at  the  time  of  acceptance. 

3.  That  are  secured  at  the  time  of  acceptance  by  ware- 
house receipt  or  other  such  document  conveying  or 
securing  title  covering  readily  marketable  staples. 

State  banks  and  trust  companies  in  New  York  are  also 
permitted  to  make  acceptances,  the  only  restriction 
being  that  the  draft  must  not  have  over  one  year  to 
run.  Nothing  is  said  in  the  state  law  as  to  the  amount 
they  may  thus  assume  or  the  character  of  the  transac- 
tion. National  banks  are  limited  as  to  the  amount  of 
acceptances  they  may  make  and  the  amount  accepted 
for  any  one  person  or  firm. 

The  merchant  or  manufacturer  desiring  to  extend 
the  scope  of  his  operations  to  cover  foreign  fields  must 
know  conditions  abroad,  what  the  demand  is,  what  com- 


"270  THE  BUSINESS  MAN  AND  HIS  BANK 

petition  if  any  exists,  the  habits  of  the  people  and  the 
adaptability  of  his  goods  to  their  needs.  He  must 
know  how  the  merchants  of  the  country  have  been 
financing  their  business.  He  must  know  the  credit 
standing  of  his  prospective  customers.  And  being 
assured  that  the  field  is  inviting,  he  should  ascertain 
how  his  bank  can  assist  in  handling  this  business.  It 
will  no  doubt  have  direct  connection  mth  a  large  bank 
in  New  York  or  other  city,  or  a  foreign  finance  associa- 
tion, by  whatever  name  called,  that  specializes  in  such 
business.  He  can  then  sell  his  goods  by  whatever 
medium  he  may  conclude  to  employ,  ship  his  goods, 
draw  his  drafts  and  sell  them  through  such  channels  as 
the  banker  will  suggest. 

If,  for  instance,  a  dealer  in  pianos  desires  to  enter  the 
South  American  market,  he  will  want  a  report  on  busi- 
ness conditions  in  the  various  countries.  Concluding 
to  enter  this  field,  he  will  send  his  salesmen  and  make  his 
connections  with  local  merchants.  As  sales  are  made 
he  will  draw  his  drafts  according  to  arrangement  and  take 
the  same  to  his  banker  who  may  send  them  to  the  Nation- 
al City  Bank,  which  has  extensive  South  American  con- 
nections through  its  own  branches.  It  will  handle  his 
business  direct,  obtain  all  necessary  information  for  his 
guidance  and  assist  him  from  the  time  he  conceives  the 
idea  until  he  gets  his  money.  It  would  be  idle  for  him 
to  go  to  some  country  banker  with  a  vision  only  as  broad 
as  the  confines  of  his  town,  for  many  such  there  are. 
He  must  connect  with  the  men  of  broad  ideas  in  New 
York,  or  other  centers  of  foreign  trade,  who  have  seen 
visions  of  world-wide  trade,  and  have  paved  the  way 
for  our  merchants  and  manufacturers  to  sell  in  every 
mart  of  the  world  as  freely  and  as  safely  as  they  do  at 
home. 

In  order  to  assist  their  customers  in  foreign   trade, 


FOREIGN  EXCHANGE 


271 


Irving  National  Bank 


NKW    VCIHK 


New  York,     UarohXE.    1920. 


Letter  of  Credit  No.      Zlll. 

Ur.  John  Doe, 
Shanghai , 
China. 


I>oar  Sir; 

You  are  hereby  authorized  to  value 

on      Tho  Irrlng  National  BarOc.  Sew  York _.-_... 

at     three   (3)   months'   sight _._-----»- -  -  -  —    — 

for  account  of    Messrs.  Smith  le  Company,  Ifew  York  ------   —  -   -  -  - 

for  any  sum  or  sums  not  exceeding  in  all      TWENTY  THOUil«<D  and  OO/lOO  DOLURS 

(|£0 ,000.00) --  " 

to  cover  iHTOloe        cost  of     Raw  Silk. 

Bills  of  Lading  to  bear  the  olau^a  -  "NotlfyWassrs.,  Smith  &  Company, 


drawn  on  or  before    May  31, 
is  to  be  effected  by     buyers 


to  be  shipped      to  Hew  York  dui-liiy^rll/May ,    1920. 


The  shipments  must  be  completed  and  drafts 
920.         The       marine  and  warriak     insurance 
Bew  York. 

The  Bills  of  Lading  to  be  issued  to  order  of 
Irving  National  Bank,  New  York,  and  one  negotiable  copy  of  each  set  with  Consular 
Invoice  to  be  forwarded  to  us  immediately. 

All  the  remaining  Bills  of  Lading  accompa- 
nied by  abstract  of  invoice      ---------------------    -- 


to  be  attached  to  drafts  and  surrendered  against  acceptance  or  remitted  direct  to  the 
drawees  with  advice  of  draft. 

And  we  hereby  agree  with  the  drawers,  en- 
dorsers and  bona  fide  holders  of  the  bills,  drawn  in  compliance  with  the  terms  of  this 
credit  that  the  same  shall  be  duly  honored  on  presentation  by  above  named  drawees. 

Drafts  under  this  credit  to  contain  the  clause 
"Drawn  under  Credit  No.  Xlll  of  the  Irving  National  Bank,  New  York,  dated  New 
York,  Maroh  12,  1920  ..,'...  "  and  to  be  noted  on  the  back  hereof  at  the 
time  of  negotiation. 

Yours  very  truly. 


PBO-TOialA. 

Vice-President. 


Fig.  23. — Import  letter  of  credit. 


272 


THE  BUSINESS  MAN  AND  HIS  BANK 

TRUST    RKCEIF»T 


New  York,  1» 

Received  in  Trpst  from  Irving  National  Bank.   New   York,  the  merchandise  specified  in  the 
dated  .  issued  by 


and  in  consideration  thercol  the'  un<3erElgiicd  hereby  agrees  to  hold  Said  ncrchaiidise  in  storage  as  the  property 
of  said  bank,  until  all  terms  hereof  :have  been  complied 'with,  with  the  libcily  to  sell  the  same  for  itj  accotmj 
but  without  Uberty  to  pledge,  and  in  case  of  sale,  to  hand  as  trust,  funds  so  received,  the  avails  as  soon  as  re- 
ceived to  the  said  bank  as  security  for  diie  provision  for  its  acceptance  on  account  of  the  undersigned  and  under 
the  terms  of  the  letter  of-  credit  noted  below ;  and  furlhcr  agrees  to  hold  said  merchandise  and/or  the  ijro- 
ceeds  thereof  in  trust  for  the  payment  of  said  acceptance  and  of  any  other  ir.dcbtcdiiess,  6i  the  undersigned 
to  said  bank.  It  is  understood,  however,  that  if  the  proceeds  of  ^ny  sale, or  di'iposition  of  said  merchandise 
shall  be  in  notes  or  bills  receivable,  they  shall  not  be  applied  hereunder  until  paid,  bi(t  ^vith,-  liberty  mean- 
while to  said  bank  to  sell  or  discount,  and  so  apply  the  net  proceeds.         ^.  '      *  "     t 

It  is  further  understood  that  the  undersigned  may  manufacture  'and  rc-maniifacture  the  atove  ttus« 
property,  always  taking  such  precautions  as  are  necessary  to;  (iroMH^  identify  the  product;  and  :may  also 'sell 
the  product  of  the  .-ame  on  the  terms  above  mentioned!  \Vhcp>fi  process  of  manufacture  or  re-manufacture  so 
that  the  product  can  no  longer  be  identified,  the  undei-siffp«<rthercupon  agree  to  keep  and  to  hold  iu  trust  tor 
above  ban!  and  as  their  trust  properly  manufactured  E»cds  of'  eiiual  value  with  the  prbperty  origitially;dcW 
.cred  to  the  undersigned  and  undersigned  will  on>i<iTiand  deliver  the  same  to  Ihe  said  Baiikl       '-■     ,'  '  ' 

It  is  further  understood  and  agreed  th.itiitr  undersigned  miVjif  any  time,  with  the  approval  o(  iaid 
Bank,  subslitule  other  goods  pf  equal  vJlueju^Uce  of  those  oruj^blly  covered  by  this  agreement,  and  the  righig 
id  Bank  in  regiird  tq.Jhe  goojJ>/<o,  substil,ute<l;shill  fcfc  tfie  sapie  in  every  respect  as  jf  such  .lubstf- 


of  the 

tution  had  not  been  made. 

The  said  bank  or  its  rcpresGHfalivcs  may  at  any'tj 
chandise  or  the  unsold  portion  thereof 
proceeds  of  the  same,  wherever  the  sa" 
this  tj-ust  receipt' shall  apply  to  and  b 
have  been  made  up  or  us^d  in  the  m^3 
the  same  ri,i,'ht3  and  remedies  agaiii 
manufacture,  as  it  wculd'have  had 


,  iS  trust  and  take  pos';essioii  of  said  mn- 

hatei^ylsondition'itjflaythcn  be  or  of  the  whole  or  aiiy.piirtiod  of 

ir.  prooj^as  may  then  be  found,  .and  all  the  provisions  o( 

inclurjj^id  abovcmentioned  merchandise  if  the  same  shaill 

f  any  o>fr  goods  or  merchandise;  and  the  said  bank  shall  have 

dise  in  its  manufactured  state,  or  the  product  Qf  such 

t  such  merchandise,  had  remained  i}i  lits  origiii.il  slate,'  and 


.Ige  I'esi 


irrespective  of  the  fact  that  other  3ni  diffclenyfierchandise  is  used  in  completing  «ucli  nianufncluril.  Ii'i  tjic; 
event  of  any  suspension,  or  failure.  Or  assignnitnt.  or  of  the  nonfulfillment  of  any  oblijatiun,  or  the  iioiip.w- 
njenfal  maturity  of  any  acceptance /nade  uxaer  said  credit, -or  any  other -credit  issued  by  the  said  bank  on  ac- 
count of  the  undersigned,  or  of  the  non-payment  of  any  indebtedness. 6n  the  part  of  the  undersigned  to  sai4 
bank,  all  obligations,  acceptances,  indebtedness  and  liabilities  whatsoever  shall  thereupon,  withonl"  notice,  inii- 
tur*  and  become  due  and  payable,-and  said  bank  may  then  in  its  discretion  exercise  the  lien  confcrrtd  on  it  in:  tfie 
last  paragraph  hereof,  :    '     '  I 

The  undersigned  further  agrees  to  Veep  said  meahaildiseinsured  to  its  full  value  against  loss  cr-dnms 
illiiig  from  fire,  water,  theft,  improper  storage  conditions,  all  risks  incurred  in  handlinp  and  transpoft- 
any  other  cause,  such  loss  or  damage,  if  any,  to  be  payable  to  said  bank;  this  at  the  proper  cost  ;i(id 
expense  Of  the  undersigneil.  who  hereby  agrees  to  pay  all  storage  on  said  merchandise^  or  any  and  all  othcc 
txpenscs  incurred  thereon.  * •  ■' 

It  is  fufther  agreed  that  any  faihire  on  the  part  of  the  undersigned  to  fully  <arry  but  any  6'f  the  ptp- 
visions.  terms  or  conditions  of  this  receipt  or  agreement,  or  of  the  agreement  under  which  the  said  bank  issutd 
ihc  letter  of  credit  by  which  said  merch;iiidise  was  purchased,  even  if  known. to  said  bank,  shall  not  be  deemed 
a  waivir^f  petfomunctof  any  such  provi.sioni  term  ot  coiidition  or  otherwise  by  saidbaiik.  or  a  waiver  of  any 
of  its  rights  or  remedies  under  elihrr  said  nti  ijit  or  .T<;rcemcut  or  of  Ihe  agreement  under  which  the  h'u\  liank 
isstied  Ihe  letter  of  credit  noted  biloiv:  and  any  waiver  in  i.rder  to  opcralc  as  such  must  be  in  writing  and  also 
endorsed  hereon  and  properly  signed, by  the  said  bank  an.d  nothing  in  this  agreement  contained  shall  iit  any 
way  affect,  vary  or  impair  any  of  the  provisions  of  the  letter  of  credit  under  which  said  merchandise  was  pur- 
chased, and  of  terms,  conditions'  or  provisions  of  the  agreement  under  which  said  letter  of'  credit  was  issued. 
■  The  undersigned  hereby  agrees  to  deliver  to  the  said  bank,  upon  demand,  collateral  security  to  its  satis- 
faction, should  Ihe  market  value  of  the  merchandise  referred  to  herein  suffer  any  decline,  and  41so  gives  to  the 
said  bank  a  lien  on  all  the  property  given  unto  or  left  in  the  possession  of.  or  hereafter  given  oi*  left  in  the  pos- 
session of  said  bank,  by  or  for  the  account  of  the  undersigned,  and  also  upon  any  present  or  future  balance  of  the 
deposit  account  of  Ihe  undersigned  with  the  said  bank,  for  the  amount  of  any  liability  hereunder  of  otherwise <ifi 
Ihe  undersigned  to  the  said  bank. 


Amount^ : 

Under  L/C  No.,. .....'. Hated 

Issued  by  

D^ie  j^broad   

Due  Here 


Fig.  24. — Tru.st  receipt 


FOREIGN  EXCHANGE  273 

banks  are  now  operating  foreign  trade  departments 
that  make  a  thorough  study  of  business  conditions  and 
possibihties  in  other  countries  and  furnish  such  informa- 
tion to  their  clients  gratis.  Tliis  information  covers 
trade  conditions  at  home  and  abroad,  markets,  actual 
and  prospective  customers,  credit  investigations  and 
reports,  using  both  the  mail  and  the  cable.  Through 
such  service  American  business  men  can  expand  their 
business  safely  and  be  assured  of  dealing  with  full  light 
as  to  their  trade. 

Goods  on  Trust  Receipt. 

In  making  acceptances  for  customers,  banks  frequently 
secure  themselves  by  taking  a  ''trust  receipt"  for  the 
goods,  which  are  delivered  to  the  buyer,  to  be  sold  or 
turned  into  other  forms,  and  the  proceeds  paid  into  the 
bank  to  cover  the  debt.  Thus  a  New  York  bank  will 
accept  a  draft  on  itself  representing  a  consignment  of 
raw  silk  for  the  account  of  a  hosiery  house.  The  silk 
will  be  turned  over  to  the  manufacturer  on  an  agreement 
to  treat  the  raw  material,  the  finished  product,  or  the 
proceeds  of  any  sales  as  the  property  of  the  bank.  The 
manufacturer  then  has  a  given  time  to  turn  the  silk  into 
merchandise,  sell  and  collect  the  proceeds  and  reimburse 
the  bank. 

The  risk  in  this  case  is  largely  moral.  The  customer 
must  be  trusted  to  deal  upon  honor,  and  the  bank's  safe- 
guard lies  in  the  fact  that  it  can  follow  the  goods  or  the 
funds  received  from  their  sale,  wherever  they  may  be 
and  claim  them  as  its  own  property,  in  the  event  that 
the  trust  is  abused.  A  reading  of  the  trust  receipt  on 
page  272  will  show  the  working  of  this  arrangement. 


18 


INDEX 


Accounts,  corporation,  30,  31 

fiduciary,  31 

opening,  28 

profitable  and  unprofitable,  97 

reconciling  bank,  85 

receivable,  141 

disadvantage  of  accounts   re- 
ceivable, 197 

loans  on  receivables,  164 
Acceptances,  126,  193 

advantage  of,  207,  209 
Acceptance,  domestic,  203 

forms  of,  200 

liability  on,  190 

object  of,  199 

operation  of,  264 

foreign,  202 

principles  of,  205 

rules     of     Federal     Reserve 
Banks,  212 
Accrued  interest,  185 
American  banks  in  foreign  trade, 

269 
Assets — fixed,  144 
Automobile  loans,  162 

B 

Balance,  bank,  23 

Balances,  daily,  interest  on,  25 

satisfactory,  24,  100 
Bank  account  and  credit,  135 
Bank  Statement,  175 
Banks,  American  in  foreign  trade, 
'  269 

choosing,  19 

examination  of,  225 

national,  7 

of  discount,  5 


Banks,  progressive,  21 

reputations,  20 

savings,  9,  213 

state,  7 

types  of,  5 
Bankers,  private,  17 
Banking  and  business,  1 
Banking  house,  180 
Banking,  new  conception  of,  3 

old  conception  of,  2 

old  time,  1 

science  of,  120 

system,  old  defects  in,  233 
Bills,    foreign   bills,    demand    and 
supply  of,  258 

payable,  190 

of  exchange,  260 

of  exchange,  forms  of,  265 
operation  of,  263 
purpose  of,  193 
use  of,  194 

how  to  strap,  36 

receivable,  143 
Bond  houses,  17 

Building  and  loan  associations,  14 
Business  risk,  130 


C 


Capital  stock,  186 

Cash,  141 

Cashier's  checks,  189 

Certification,  78 

Certified  checks,  189 

Certificates  of  deposit,  188 

Checks,  collecting  direct,  89 
out  of  town,  87 
through  clearing  house,  105 
through     Federal     Reserve 
Banks,  90,  102,  248 


275 


276 


INDEX 


Checks,  collection  of,  46 
features  of,  76 
for  small  sums,  83 
how  to  draw,  50 
how  to  indorse,  42 
importance  of,  47 
journey  of,  101 
large,  collecting,  88 
keeping  record  of,  37 
kiting,  54 
memoranda  on,  83 
obligation  to  pay,  75 
paid  as  presented,  79 
protection  of,  52 
W.  J.  Burns,  60 
history  of,  57 
raised,  53,  54,  61,  62,  63,  64, 

66,  67,  70,  71,  72 
stale,  82 

stop  payment,  84 
to  corporation  officers,  41 
transfer  rights,  46 
why  they  should  be  collected 

promptly,  48 
without  indorsement,  36 
writers,  58 
Choosing  a  bank,  19 
Clearing  house,  purpose  of,  106 
Clearing,  principle  of,  107 
Clearing  process,  108 
Clearing  house  collections,  105 
Collateral  loans,  154 
Collateral,  form  of,  158 
Collections,  167 
Collections,  kinds  of,  168 
parties  to,  173 
of  drafts,  170 
Commercial  paper,  146 
Corporation  accounts,  30-31 

checks,  41 
Counterfeit  monej^  39 
Coupons,  36 
Credit,  119 

and  business,  121 
defined,  122 
science  of,  128 


Credit,  forms  of,  123 

sensitive,  129 
Currency,  inelastic,  238 
Customer's  liability,  186 

D 

Defects  in  old  banking  system, 
233 

Deposits    (in  bank  statement), 
188 
how  to  make,  35 

Difference  between  banks  of  dis- 
count and  savings  banks, 
&-13 

Discount,  bank  of,  5 

Discounts,  Federal  Reserve  Bank, 
245 

Discount  system,  239 

Discount,  unearned,  192 

Drafts,  169 

dunning,  170 
grain,  172 

Duns,  170 


E 


English  banks,  monopoly  of,  262 
Examinations,  bank,  225 
Exchange,  92 

rates,  rise  and  fall  of,  266 
Exchanges,  clearing  house,  185 


Fail,  why  men,  131 
Failures  analyzed,  131 
Federal  Reserve  Bank,  229 

Control  of,  241 

features  of,  240 

check  collections,  248 

reserves  of,  242 

notes,  244-247 
Fiduciary  accounts,  31 
Finance  methods,  present-day,  196 
Foreign  exchange,  basis  of,  261 
how  arises,  256 


INDEX 


277 


Foreign  exchange,  instruments  of, 
258 
principles  of,  253 
trade,  254 
Forgery,  57 
Functions  of  a  bank,  6 
Funds  uncollected,  82,  98 
Furniture  and  fixtures,  185 


G 


Gold  settlement  fund,  Federal  Re- 
serve Bank,  250 
Good  will,  145 
Goods  in  trust,  161 

on  trust  receipt,  273 
Government  deposits,  237 
Grain  drafts,  172 


Loaas,  mortgage,  12 

on  automobiles,  162 
on  receivables,  164,  165 
real  estate,  156 
recording,  151 
warehouse,  160 

M 

Machinery,  144 

Memoranda  on  checks,  83 

Merchandise,  142 

Money,  counterfeit,  39 

Mortgage  companies,  15 
loans,  12,  181 

how  made,  215-216 
papers  and  process,  217 


H 


Hoarding,  236 


Indorsements,  42 
Indorsement,  forms  of,  43 

missing,  36 
Interest  accrued,  185,  192 

on  daily  balances,  25 

rules,  savings  banks,  219 
Investments,  bond,  179 

of  savings  banks,  219 

K 


N 


National  banks,  7 

notes  of,  248 
Notes,  promissory,  rules  regarding, 
153 
recall  of,  174 
Numerical  transit  system,  38 

O 

Open  accounts,  197 
Overdrafts,  113,  183 


Kiting  checks,  54 


Land  contracts,  181 

Legal  tender,  80 

Letter  of  credit,  267,  268,  271 

Liabilities  in  statements,  146-149 

Loans  and  discounts,  150,  152,  182 

bookkeeping  of,  151 

collateral,  154 


Panics,  238 

Par  points,  95 

Pass  book,  32 

Patents,  trademarks,  145 

Paying  teller,  74 

Point  of  contact,  27 

Profit,  through  borrowing,  157 

Protest,  116 

Protest,  time  of  notice,  117 

Protection  of  checks,  52 


278 


INDEX 


R 

Real  estate,  144,  181 

valuation  of,  218 
Receivables,  141 
Receiving  teller,  34 
Reconciling  bank  account,  85 
Reserve  accounts,  creating,  93 

agents  due  from,  183 
Reserves  for  taxes,  191 
Rights,  123 
Risk,  property,  134 

S 

Sate  deposit  companies,  16 

Savings  V)ank,  functions  of,  214 
interest  rules,  219 
investments  of,  219 
management  of,  220 
routine  of,  222 

Silver,  how  to  wrap,  36 

Specie,  184 

Stale  checks,  82 

State  banks,  7,  9,  213 

Statement,  bank,  177-178 
how  to  read,  175 

Statement  complete,  139 


Statement,  credit,  137 
how  to  prepare,  140 
refusal  to  make,  137 
Stock,  capital,  186 
Stocks  and  Bonds,  144 
Stop  payment,  84 
Substitutions,  157 
Surplus,  bank,  186 


Teller,  receiving,  34 
paying,  74 

how  to  work  with,  77 
Title  companies,  15 
Transit  number,  38 
Trust  companies,  6,  184 
Trust  receipt,  272,  273 

goods  held  in,  161 
Types  of  banks,  5 

U 

Uncollected  funds,  82,  98 
Undivided  profits,  187 

W 

Warehouse  loans,  160 


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